Calculation of Damages for Infringement of IP Rights

14 January 2005

Dr Clemens A. Heusch, Dr Matthias F. Meyer

On 29 April 2004, the European Commission adopted the so-called “Enforcement Regulation” (2004/48/EC) dealing with the effective enforcement of intellectual property (IP) rights. The directive has to be implemented into national law by 29 April 2006. The Enforcement Regulation deals, inter alia, with the disclosure of certain information to the proprietor of the potentially infringed IP rights, the extent to which the infringer can be held to account, the preliminary measures which may be taken against a potential infringer and the level of damages available to the proprietor.

Calculation of damages

According to Art. 13 para 1 of the Enforcement Regulation, damages for infringement can be calculated in one of two ways: (i) by taking into account all possible aspects related to the infringement such as the negative economic consequences for the claimant (including lost profits), any unfair profits made by the infringer and purely economic factors; or (ii) the calculation of a lump sum on the basis of at least the amount of royalties or fees which would have been due if the infringer had obtained a licence to use the IP rights in question. In an earlier draft of the Enforcement Regulation, the Commission had proposed punitive damages of twice the royalties but this was taken out in the early stages to ensure that the Enforcement Regulation could be passed before EU Enlargement on 1 May 2004.

According to current German law, the claimant can elect one of three methods discussed below for calculating the damages for infringement. He will invariably choose the method which provides him with the highest level of damages.

i) Proprietor’s lost profit

The proprietor has to quantify the profit he would have made, had the infringement not taken place, i.e. if he had sold the products himself rather than the infringer. This method is seldom used in practice because the proprietor has to disclose his accounts and because the required causation can be difficult to establish.

ii) Licence analogy

Damages are based on a hypothetical licence fee, i.e. the fee which parties would reasonably have agreed upon if they had negotiated a bona fide licence. There are specific valuation parameters which vary from case to case and from business to business. The rationale for this method of calculation is that the infringer should not end up in a better position than a licensee who asked for a licence in advance. The fact that the proprietor may not, in fact, have granted a licence to the infringer is irrelevant.

iii) Infringer’s profit

The proprietor must prove how much profit the infringer has actually made. The court will usually require the infringer to account to the proprietor as to the number of infringing products sold, the turnover, the cost of material, production etc.

This method was traditionally not very popular for proprietors because it was not difficult for an infringer to disguise profit through high costs and overheads. However, the German Federal Supreme Court has recently set strict standards for deducting cost factors from the turnover. Specifically, the Federal Supreme Court decided that overhead costs are only deductible if they can be attributed directly to the infringing product. Further, the Federal Supreme Court has put the burden of proof on the infringer for the direct attribution of overhead costs to the infringing product. This leads to the result that the deductible overhead costs are now usually lower and the infringer’s profit accordingly higher.

Compatibility of German law with the Enforcement Regulation

These methods of calculating damages for infringement of an IP right under German law appear to be in line with Art. 13 para 1 of the Enforcement Regulation. In relation to the licence analogy method, this is obvious as German law also provides for this calculation method in accordance with Art. 13 para. 1 (b) of the Enforcement Regulation.

Art. 13 para. 1 (a) of the Enforcement Regulation is also already implemented in German law. Art. 13 para. 1 (a) mentions both the calculation on basis of the infringer’s gained profit and on the basis of the proprietor’s lost profit. We understand the wording of Art. 13 para. 1 (a) to mean that more than one calculation method can be considered when calculating damages, but that only one such method can ultimately be applied. Furthermore this interpretation is consistent with the fact that a calculation of damages cannot be based on several different calculation parameters which are mutually exclusive, e.g. the lost profit of the proprietor on the one hand and the profit obtained by the infringer on the other hand. Thus, Art. 13 para 1 (a) allows either the proprietor’s lost profit or the infringer’s obtained profit as a basis for calculating damages, as is the case in Germany.

Accordingly, there do not appear to be indications from German Courts or German academic literature that because of Art. 13 of the Enforcement Regulation the known methods for calculating damages should be amended.