Transcript No Slide Title

What’s the damage?
Financial remedies for infringement of IP rights
Licensing Executives Society
Mark Bezant
10 September 2003
IP infringement financial remedies
Lost sales
Price erosion
Lost profits
Inquiry as
to
damages
Bridgehead
damages
and / or
Incremental profits
Financial
remedies election
Tring
v
Island Records
Ancillary sales
Gerber
v
Lectra
Reasonable
royalty
Account
of profits
Calculate
infringer’s total
profits
Reflect consequential
benefits of licensing IP
Allocate to IP
Hoechst Celanese v BP Chemicals
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Inquiry as to damages
Conceptual framework for IP infringement
Price
‘But for’
Price
erosion?
Sales volumes
lost to infringer?
‘Actual’
Reasonable royalty on
the rest of the
infringer’s sales ?
Quantity
Infringer’s total sales
Skills:
Economics
- market analysis
- cost behaviours
Accounting
- cost allocation
- cost measurement
Licensing/
valuation of IP
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Inquiry as to damages - lost sales/ price erosion
and market definition
In the blue corner
Hoover’s Vortex range
In the silver & yellow corner
Dyson’s Dual Cyclone
Head to head - nozzle to nozzle
© Deloitte & Touche.
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Recovery of lost profits
UK principles - Gerber v. Lectra
 Ancillary damages
 lost profits relating to sales of items which do not contain the patented item but are
complementary e.g. spare parts, consumables or services sold with a product containing the
patented item
 provided these losses are consequential and foreseeable
 Bridgehead damages (“springboard” damages/ accelerated market entry)
 losses suffered post-infringement, including post-expiry of the patent, by the establishment of a
market presence through infringement
 Sales via subsidiaries
 recovery of damages by patentee/ exclusive licensee
 loss to parent (patentee) cannot be presumed to equal loss to subsidiary where sales occur via a
subsidiary
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Legal structure of groups interaction with international commercial/ tax planning
and implications for IP litigation
IPCo
OpCo
OpCo
What happens if the company
registered as the proprietor of the IP
(IPCo) is not actually the entity in
the group that suffered a loss
following an infringement (OpCo)?
HoldCo
IPCo
OpCo
OpCo
OpCo
IPCo
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Recovery of lost profits
UK principles - recent authority
 Causation: patentee to prove that customer awarded a contract to the defendant because
of a demand for the patented technology (Coflexip v. Stolt)?
 point remains open following recent Court of Appeal decision
 Recovery of damages for lost profits on non-patented items (SmithKline Beecham v.
Apotex)
 recoverable if natural and probable consequence of the infringement
 includes ancillary sales
 recovery subject to remoteness
 UK becoming closer to US position (Rite-Hite v Kelley)?
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Reasonable royalty - calculation of damages

Damages are assessed by reference to the royalty which would have been
agreed between a willing licensor and a willing licensee (at the date of the
first infringement)

Hypothetical (artificial?) situation by definition, no willing licensor or licensee

Approach seeks to provide claimant with fair compensation i.e. loss of
licensing income, which should have accrued to the plaintiff as licensor

Royalty is that under a licence where licensor does not compete with
licensee (because hypothetical licence relates to those sales the Court finds
would not have been lost sales by the Claimant)
 can’t assess royalty by reference to licensor’s profits qua manufacturer

No authority on the other terms of the hypothetical licence
 unhelpful given that a licence royalty reflects the rights and obligations of the
parties under the terms of the licence
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Reasonable royalty may be assessed using a
number of approaches - IP valuation

Royalty rates established by the claimant in similar circumstances (“comparables”
approach)
 adjust for differences
 “preferred” approach in many cases (Copyright Tribunal)

Industry norms for licences for similar IP
 “5% for patents?”

Allocation of economic benefits deriving from the use of the IP (“available profits”
approach)
 “25% rule”/ rule of thumb
 no common ground as to measurement of profits?
 allocation of available profits reflects relative contribution of parties to the licence and
allocation of risk and reward

Cost of designing-around the IP
 contrast with position assumed under UK law regarding lost sales, where the infringer can’t
say that it, in the alternative to infringing, it could still have taken a sale from the Claimant by
non-infringing means
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Court-imposed royalties

Royalty rates acceptable to the parties (as “willing” licensor/licensee) may not overlap

Issue in both Catnic Components v Hill & Smith [1983] and Gerber v Lectra [1995]

Differences reflected different approaches to estimating profits available to pay a
royalty
Catnic
Gerber
Patentee
Patentee’s profits on
own sales [20%]
Infringer’s incremental
profits including ancillary
sales [25%]
Infringer
Estimated cost
savings using
patented product [2.5%]
Infringer’s net profits,
excluding ancillary sales
[1% - 1.5%]
Court
10%
15%
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Hoechst v BP - principles for an account of
profits

Account cannot be determined by reference to incremental profits over
those obtained by non-infringing means

Account cannot be less than nil (even if infringement reduced losses)

Profits calculated using defendant’s actual accounting and normal
accounting principles

Total profits apportioned appropriately to the infringing aspect
– exclude profits not caused by infringement
– re-weight, if justified, to reflect relative merits of infringing aspect
=> Accounting perspective in contrast to economic perspective underpinning an
inquiry as to damages
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Account of profits
Icing Laddie J’s cake
The profit
icing…
…evenly
spread? Or
weighted?
The whole
project “cake”
The infringing
slice
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Election for remedies your average gain or…
…my incremental loss?
Account of profits
Damages
 Their per unit profitability may well
be higher if they are freeloading…
 …but perhaps they did not recover
their initial investment, if you nipped
it in the bud
 Any evidential battle will be on their
turf
 What proportion of their business
would have been yours?
 Do your incremental profits
outweigh their average profits?
 Will there be a lasting effect of their
wrong acts?
Trade off: amounts v. evidential risks and costs
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Heads of damage for trade mark actions
McGregor on Damages, 16th Edition
Past effects
Future effects
Loss of business profits caused by the
diversion of the claimant’s customers
to the defendant as a result of the
defendant’s misrepresentation
Any loss of
business
reputation and
goodwill of the
claimant resulting
from the
infringement
Further loss of profits through
reduction of the claimant’s prices in
response to competition arising out of
the defendant’s infringements
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Reasonable royalty concept extended to
copyright (and trade mark) cases
Blayney v Clogau St. David’s Gold Mines Ltd [2002]
“Given that is the rule in the case of infringements of patents I can see no reason
not to apply it in cases of infringements of copyright. In each case the
infringement is an interference with the property rights of the owner … Though
the nature of the monopoly conferred by a patent is not the same as that
conferred by copyright, I see no reason why that should affect the recoverability
of damages in cases where the monopoly right has been infringed.”
Court of Appeal awarded 5% royalty
Reed v. Reed [2002]
“…it is necessary to hypothesise the willing licensor and licensee. The general
principles applicable where the claimant cannot show an actual loss are
described by Lord Wilberforce in a much-quoted passage in General Tire v.
Firestone [1976] RPC 197. Although a patent case, the principles are equally
applicable to trade mark infringement.”
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Interaction of different IP rights
Dyson v Hoover – the value of a springboard
The patent
The trade mark
For a period of 12 months
following expiry of the
patent – selling any
Hoover Triple Vortex
vacuum cleaner; or any
other vacuum cleaner
made in accordance with
the invention (unless not
designed/tested within the
jurisdiction while the
patent was in force)
For a period of 6 months
following the date of the
order - marketing any
vacuum cleaner under the
trade mark VORTEX or by
using the Triple Vortex logo
(unless no likelihood of
deception)
Injunction granted
Injunction not granted no
evidence Dyson would
suffer from Hoover’s
continuing use of the trade
mark as a foreseeable
consequence of the patent
infringement
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Closing comments

Increasing interaction of different classes of IP rights poses challenges
– multiple drivers of demand
– allocation of value

Filter out the noise
– definitions of markets / channels (“head to head challenge”?)
– positive evidence (e.g. customer reason for purchase decision) to eliminate
other factors

Be aware of
– legal structures (right to bring an action)
– IP value “established” in tax filings, statutory accounts, transactions,
performance management systems etc
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Any questions?
Now or later…
Mark Bezant
[email protected]
Tel: +44 (20) 7007 2956
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