2019 <Special News Flash>｜News Letter

Grand Panel Specifically Rules How to Calculate Damages with Indicating Circumstances where Damages may be Abated

NeoChemir Inc. and 6 other companies v. Medion Research Laboratories Inc., Case No. 2018 (Ne) 10063 (Decision rendered on June 7, 2019)

The Grand Panel¹⁾ of the IPHC (Chief Judge, Makiko TAKABE) specifically rules how to calculate damages on the basis of “infringer’s profits” (Art. 102 (2) of the Patent Law), and on the basis of “reasonable royalty” (Art. 102 (3) of the Patent Law).
In the decision, the Grand Panel shows that “infringer’s profits” set forth substantively in Art. 102 (2) corresponds to a so-called marginal profit, and that the damages based on the “infringer’s profits” may be abated by taking into consideration, for example, non-identity of the markets, presence of competing products, business efforts of the infringer (i.e., brand strength and promotional advertising), and performance of infringing articles.
The Grand Panel also shows that the rate of “reasonable royalty” set forth substantively in Art. 102 (3), which is acknowledged as a minimum damages, would naturally be higher than the normal royalty rate where a license agreement is made through negotiation.

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The Patentee, Medion Research Laboratories (MRL) obtained two patents relating to a kit for obtaining a viscous composition containing carbon dioxide in 2011 and 2012, respectively.

On the basis of the 2 patents, MRL filed a patent infringement suit against NeoChemir and 10 other competitors with Osaka District Court in 2015. Osaka District Court issued an injunction against all the Defendants’ sales and the like of their infringing products, and awarded damages against all the Defendants for the infringement on June 28, 2018.

Against the Osaka District Court’s decision, 7 losing parties among the 11 Defendants filed an appeal with the IPHC in 2018, and the IPHC decided to hear this case before the Grand Panel in March, 2019.

The Grand Panel of the IPHC decided as follows regarding the amount of damages.

(1) Regarding the amount of profits the infringers earned by the acts of infringement provided for in Article 102, Paragraph 2 of the Patent Law
(a) The amount of profits the infringers earned by the acts of infringement provided for in Article 102, Paragraph 2 of the Patent Law is in principle reasonably construed as the entire profits that the infringers earned, and it should be construed that the presumption provided for in the paragraph applies to such entire profits.
The amount of profits that the infringers earned by the acts of infringement should be construed as the amount of marginal profits obtained by deducting costs additionally necessitated in direct association with the production and sales of the infringing articles by the infringers from the amount of the entire sales of the infringing articles by the infringer, and the patent holder bears the burden of assertion and proof thereof.
For example, raw material costs, purchasing costs, transportation costs and the like for the infringing articles are costs additionally necessitated in direct association with the production and sales of the infringing articles. On the other hand, for example, labor costs of the management department, or transportation and communication costs and the like do not normally correspond to costs additionally necessitated in direct association with the production and sales of the infringing articles.
(b) In this case, among the labor costs, testing and research costs, promotional advertising costs, sample costs and purchasing costs of stock articles alleged by the appellants, portions of the testing and research costs and the promotional advertising costs can be said to be costs additionally necessitated in direct association with the production and sales of the infringing articles, and therefore correspond to deductible costs. However, other costs cannot be said to be costs additionally necessitated in direct association with the production and sales of the infringing articles, and therefore cannot be reasonably considered to be deductible costs.

(2) Regarding grounds for overriding the presumption provided for in Article 102, Paragraph 2 of the Patent Law
(a) Regarding overriding the presumption provided for in Article 102, Paragraph 2 of the Patent Law, similarly to the conditions provided for in the Proviso to Paragraph 1 of the same Article, the infringers bear the burden of assertion and proof. Therefore, conditions impeding reasonable causality between the profits earned by the infringers and the damages inflicted by the patent holder are construed to correspond to such grounds. For example, conditions such as: (1) presence of differences in business operations and the like between the patent holder and the infringers (i.e., non-identity of the markets); (2) presence of competing products in the market; (3) business efforts of the infringers (i.e., brand strength and promotional advertising); and (4) performance of infringing articles (i.e., features other than the patented inventions such as function, design and the like), similarly to the conditions provided for in Article 102, Proviso to Paragraph 1, are construed as conditions for overriding the presumption provided for in Paragraph 2 of the same Article. Moreover, even in the case where a patented invention is exploited only partially in an infringing article, the conditions can be considered as those overriding the presumption. However, since the patented invention is exploited only partially in the infringing article, overriding the above presumption should not be immediately, but it is reasonable to determine by comprehensively considering conditions of materiality of the portion that the patented invention is exploited in the infringing article, customer attracting power of the patented invention and the like.
(b) In order to qualify for a competing product, it is considered that the product needs to be in a competitive relation with the infringing article in the market. Moreover, even if there are conditions such that the infringing article has excellent efficacy compared to the product of the patent holder, or that the infringing article is a licensed product of another patented invention, overriding the presumption cannot be immediately concluded from the conditions. There should be conditions that the presence of excellent efficacy, or that the product is a licensed product of another patented invention contributed to the sales of the infringing article.
In this case, among the grounds for overriding the presumption alleged by the Appellants (NeoChemir et al.), the presence of competing products, presence of business efforts made by the Appellants, that each of the products of the Defendants has efficacy, and that each of the products of the Defendants is a licensed product of a patented invention of one of the Appellants are either all not grounded by facts, or all lack conditions that they contributed to the sales of the infringers. Moreover, other grounds for overriding the presumption alleged by the Appellants are irrelevant to the damages inflicted by the Appellee (MRL), and do not constitute grounds for overriding the presumption. Therefore, overriding the presumption provided for in Article 102, Paragraph 2 of the Patent Law cannot be admitted.

(3) Regarding the amount of money receivable provided for in Article 102, Paragraph 3 of the Patent Law
(a) Article 102, Paragraph 3 of the Patent Law is a provision that sets forth the minimum amount of damages that a patent holder is entitled to claim in the case of a patent infringement.
The amount of damages set forth in the Paragraph should in principle be calculated on the basis of sales of infringing articles by multiplying the sales by the rates receivable for the license.
(b) Regarding the “amount the patentee or exclusive licensee would have been entitled to receive for the working of the patented invention” set forth in Article 102, Paragraph 3 of the Patent Law, it was stipulated as the “amount the patentee or exclusive licensee would have been entitled to normally receive for the working of the patented invention” before the amendment by the 1998 Law No. 51. Under the provision of the “amount … would have been entitled to normally receive”, an infringer would be better off infringing a patent, and thus the term “normally” was deleted in the amendment.
In a license agreement of a patented invention, royalty rates are determined in advance, at a stage where attribution of the license to the technical scope is not clear or the possibility of the patent being invalidated is present, usually under circumstances of being subjected to various constraints such as the licensee paying a minimum amount of guarantee and being not able to claim repayment of royalties already paid even in the case where the patent is invalidated. Whereas the infringer does not bear the contractual constraint mentioned above in the case where the act does not constitute a patent infringement on grounds that the patent belongs to the technical scope of the patent and cannot be said to be invalidated. Further, in light of the circumstances of the amendment of the Patent Law mentioned above, in calculating the amount of damages based on the Paragraph, it is not always necessary to follow the royalty rate determined in the license agreement regarding the patent. Rather, it should be considered that the rate receivable for the license applied to the patent infringer to be determined later is naturally higher compared to the normal royalty rate.
Therefore, the rate receivable for the license should be reasonably determined by comprehensively considering conditions that appear in a lawsuit such as: (1) the royalty rate in an actual licensing agreement of the patented invention, or the market price and the like of the royalty rate in the business when such royalty rate is not clear; (2) the value of the patented invention itself, that is, the technical content and importance of the patented invention, the possibility of substitution by other products; (3) contribution to sales and profits or aspects of infringement when using the patented invention for the product; and (4) competitive relationship between the patent holder and the infringer or business policy of the patent holder.
(c) In this case: (1) the actual royalty rate of each of the patents of this case in the license agreement does not appear in the lawsuit. A recent statistical average royalty rate in the field that the technical field of each of the patents in this case belongs to is 5.3% according to survey of domestic enterprises, and is 6.1% according to judicial decision. Further, there is a case where a settled amount regarding infringement of a patent in the same field as that of the patent of the appellee was 10% of sales; (2) the invention at issue 1-1 and the invention at issue 2-1 have reasonable importance, and do not have alternative techniques; (3) licensing of the invention at issue 1-1 and the invention at issue 2-1 can be said to contribute to the sales and profits of each of the products of the Defendants; (4) the Appellee and the Appellants are in competing relations. Considering such conditions appearing in the lawsuit, the rate receivable for the licensing to be determined later against the patent infringers is reasonably determined to be not less than 10%.

Conclusively, the IPHC dismissed the 7 Appellants’ appeal, and upheld the decision rendered by the 1st instance, i.e. the Osaka District Court.

The losing parties are entitled to bring the case to the Supreme Court within 14 days after the mailing date of the decision, and thus the decision is NOT final and binding as of June 13, 2019.

1) Grand Panel: The Grand Panel is convened to hear cases where it is necessary to virtually unify court decisions, or cases involving important issues, which is somewhat similar to en banc in CAFC of the U.S.A. Since the founding of the IPHC in 2005, 13 cases including the above case have been heard by the Grand Panel.

K&P’s Comments This Grand Panel decision organizes matters to be considered, some of which were controversial before, when calculating damages on the basis of infringer’s profits and reasonable royalty, and will become highly valuable guidelines for calculating the damages in future cases.