Italian Supreme Court provides guidance on equitable compensation for damages under Intellectual Property Code

Background

A company selling industrial vehicles for cleaning sewers, ducts and vacuum loading dusts and solids sued a competitor that marketed vehicles which implemented a patent owned by the plaintiff without a license. 

The dispute went through first and second instance judgements with damages a key subject of the dispute. It ultimately reached the Supreme Court, where the court ruled on issues relating to the measure (quantum) of compensation for damages.

Compensation for damages (and disgorgement of profits) under Italian law

Art. 125, para. 1 and 2 of the Italian Intellectual Property Code (“IIPC”) provides two alternative criteria to determine the measure of compensation for damages:

1. the ordinary criterion: this considers the two components of direct prejudice and loss of profits, and takes into account all of the relevant circumstances of the case. Relevant factors are, for example, the negative economic consequences, including the infringed IPR holder’s loss of profits, and benefits achieved by the infringer. Non-economic components, such as moral damages, may also be considered in appropriate cases; 
   
   
2. the equitable determination criterion: when it is not possible to determine the measure of the damages actually suffered, or when such determination would be too burdensome for the IPR holder, compensation may be established in an overall amount, in view of the documents filed in the proceedings and inferences that can be drawn from them.  The loss of profits shall be, in any case, not lower than the royalties that the infringer would have paid to obtain a license from the infringed right holder (“reasonable royalty” criterion).

Additionally, Art. 125, para. 3 IIPC provides that “In any event, the holder of the infringed right may request the disgorgement of profits obtained by the infringer, either as an alternative to compensation for the loss of profits or to the extent that they exceed that compensation”.

Regarding the case at issue, several topics related to the equitable determination of loss of profits have been addressed, two of which are considered below.

First issue: Where a patent holder has used alternative criterion to equitably determine compensation for damages, must the “reasonable royalty” criterion be applied as well? 

In this case, the patent holder claimed compensation for damages only, not disgorgement of profits. 

The Court of First Instance ascertained it was not possible to determine the exact measure of damages suffered by the patent holder and therefore relied on the “reasonable royalty” criterion. The Court applied the rate usually applied in similar industries to the average turnover obtained from the sale of each infringing vehicle, reduced in the light of incremental production costs.

On appeal, the patent holder claimed that the Court should have determined compensation by applying a different equitable criterion based on the “real loss of profits”, calculated by applying the patent holder’s gross profit margin to the turnovers obtained by infringing products sales.

The Court of Appeal dismissed such a request, on the basis that the patent holder had not shown they had suffered damage in the measure claimed.

By contrast, the Supreme Court found that the patent holder had in fact offered a reasonable alternative equitable criterion to determine the measure of the compensation which - if applied - would have been higher, more fair and effective, and would have taken into account all the relevant aspects, such as the negative economic consequences, including the loss of profits for the patent holder and the benefits unlawfully obtained by the infringer.

The Supreme Court reversed the decision, stating that the criterion of the "reasonable royalty" "is only the lower limit of damages determined on an equitable basis, which, however, cannot be used if the injured party indicated further and different reasonable equitable criteria, with the objective of a full compensation of the prejudice suffered by the intellectual property right holder".

2. Where the “reasonable royalty” criterion is applied, is it a requirement of Italian law that the royalty rate be doubled, or at least increased?

The patent holder claimed that the Court of Appeal erred in in its findings because, while applying the “reasonable royalty” criterion, the Court had not doubled or even increased the measure of the royalty. According to the patent holder, the criterion of the “fair royalty” represents only “the minimum standard” equal to the typical royalty rate in the industry. Therefore, such royalty rate must always be increased, otherwise the infringer would be put in the same position as a lawful licensee.

However, whilst the Supreme Court acknowledged that the case law often considers a reasonable increase of the market reference royalty to be fair, it concluded that the law does not mandate the application of such an increase.

Conclusion

On the one hand, the decision is important because it establishes that the “reasonable royalty” criterion is not the “second choice” in case damages cannot be determined in the exact amount, but rather a residual criterion in case no other equitable criteria identified by the patent holder can be applied. 

On the other hand, the fact that the Supreme Court found that the law did not mandate increase of the royalty rate where the “reasonable royalty” criterion is applied will likely be subject matter of discussion, as scholars and significant case law had frequently supported the opposite approach.