“Punitive damages” under industrial property law?

In its judgment of 25 January 2017, the ECJ decided that Article 13 of Directive 2004/48/EC of the European Parliament and the Council does not conflict with a provision of the Polish Copyright Act, which provides that the holder of an infringed right may demand a lump-sum indemnity equal to twice the appropriate usage fee as damages, without proof of causality. The decision is reprinted, e.g., in GRUR Int. 2017, pp. 264 et seq.

This judgment raises the question of whether the path to claims for “punitive damages” – which exist under American law – is now open in Germany.

In the German understanding of the law, a damages claim must meet the following requirements: There must be an act of infringement, a loss actually suffered and causality between the act of infringement and the loss. Compensation may only be demanded for a loss that is causally connected to the act of infringement. The injured party bears the burden of presentation and proof of the act of infringement, the occurrence of the loss and causality. If the in-jured party fails to prove causality, he/she receives no compensation for the loss.

Therefore, punitive damages – without proof of causality – is an alien concept to German lawyers. In general, there is no “infringer surcharge” in German law (settled case law; cf. only BGH [German Federal Court of Justice] GRUR 1980, pp. 841 et seq. – Tolbutamid). A likely exception: With photographs, failure to credit the author results in a 100% surcharge on the usual user fee (cf. e.g. Dreier/Schulze, regarding § 13 UrhG [German Copyright Act], marginal no. 35 with additional notes).

There are special difficulties in determining damages in the field of industrial property law. For example, how does the holder of an infringed industrial property right prove a loss when he/she is economically successful and his profits are steadily increasing? And, if his profits decline, how does he/she prove that this is due to the infringement of his industrial property rights?

In view of these difficulties, there are three well-known ways of calculating damages in the field of industrial property rights: compensation for lost profits, payment of a reasonable (or “fictitious” or “customary”) licence fee, and surrender of the infringer’s profit. These three types of calculation were recognised practices in German case law for decades before they were incorporated into the industrial property rights and copyright statutes, effective as 01 September 2008.

The versions of §§ 139 (2) PatG [Patent Act], 24 (2) GebrMG [Utility Model Act], 14 (6) MarkG [Trademark Act], 42 (2) DesignG [Design Act] and 97 (2) UrhG in effect as of 01 Sep-tember 2008 read as follows:

“Whosoever acts with malicious intent or negligence shall be obligated to compensate the infringed party for the damage suffered. The profit which the infringer has made through the infringement of the right may also be taken into account when assessing the compensation. The compensation claim may also be calculated on the basis of the amount which the infringer should have paid as a suitable remuneration if he/she had obtained authorisation to use the invention.”

These statutory provisions are based on Article 13 of Directive 2004/48/EC (the so-called Enforcement Directive), which was mentioned at the outset and whose section on damages reads as follows:

“When the judicial authorities set damages, they shall proceed as follows:

a) they shall take into account all appropriate aspects, such as the negative economic consequences, including the lost profits which the injured party has suffered, and the unfair profits made by the infringer and, in appropriate cases, elements other than purely economic factors, such as intangible losses suffered by the rights holder,

or

b) as an alternative, they may, in appropriate cases, set the damages as a lump-sum on the basis of elements such as the least amount of royalties or fees which the infringer would have had to pay if the infringer had obtained authorisation to use the intellectual property rights in question.”

The word “least” in der Enforcement Directive, which has been underscored by the undersigned, is not included in the German law provisions reproduced above. Nevertheless, Article 13 of the Enforcement Directive, including the word “least”, must clearly be taken into account in determining damages (cf. in this regard, Meier-Beck, Schadenskompensation bei der Verletzung gewerblicher Schutzrechte nach dem Durchsetzungsgesetz, WRP 2012, pp. 503 et seq.).

Moreover, it has long been recognised in German case law that the advantages that the infringer has as compared to an honest licensee must be offset in determining damages under industrial property law (BGH GRUR 2000, 685 et seq., 3 b) – Formunwirksamer Lizenzvertrag).

Thus, for example, in the “Teigportioniervorrichtung” decision, the Regional Court of Düsseldorf increased the basic licence rate by 0.5% from 5% to 5.5% because the infringer – contrary to an honest licensee – is not required to tolerate a review of his books (cf. LG [Regional Court of] Düsseldorf GRUR 2000, pp. 309 et seq. – Teigportioniervorrichtung). In the same decision, the Regional Court of Düsseldorf increased the basic licence rate by an additional 0.5% to a final 6% because the infringer is not required to pay licence fees for a non-protectable invention. An honest licensee may generally not demand a refund of the licence fees he/she has paid if the industrial property right is nullified during the term of the licence agreement (see, in particular, ECJ GRUR 2016, 917 et seq. – Lizenzzahlung trotz Nichtigkeit des Patents). The infringer does not bear this risk. If the industrial property right is nullified during the trial and before the judgment is issued, he/she does not have to make any pay-ments. If he/she has paid damages based on a court judgment, and the industrial property right is subsequently nullified, he/she may demand a refund of the payments made – and can even do so after the judgment is final and binding, by way of a restitution action under § 580 No. 6 ZPO [German Code of Civil Procedure].

In determining damages in accordance with the licence analogy in its “Gülleausbringung” decision, the Regional Court of Munich I also took into account the peculiarities that distinguish a judicially established infringement situation from the usual situation between reasonable parties in the initiation of a licence agreement, such as clarification of the legal validity of the industrial property right by the owner, clarification of the use of the patent by the infringer, mistrust of the accuracy of the information supplied by the infringer, and increased risk of default for the patent holder. Moreover, the Regional Court of Munich I included in its deliberations the additional costs and time which the holder of the industrial property right must expend to enforce his/her claims against the infringer in multi-year litigation. These special circumstances have led the Regional Court of München I to increase the basic licence rate by 66% (Re-gional Court of München I, 2013 Reports, pp. 275 et seq. – Gülleausbringung).

With respect to the other circumstances that may be taken into account to increase the li-cence fee, reference is made to the remarks made in Kühnen, Handbuch der Patentver-letzung, 9th edition, I. Schadenersatz, marginal nos. 111 et seq.

Therefore, the infringer must often pay a higher licence rate than an honest licensee as damages.

The undersigned’s conclusion: In determining damages in the field of industrial property rights, there are already de facto “punitive damages” under German law, even if we do not call them that. The judgment of the ECJ dated 25 January 2017 offers the injured party assistance in arguing that the basic licence rate should be increased by up to 100%.