Remedies in IP Infringement Litigation – The German approach presented at the International Conference on Judicial Protection of IPR 9-11 July 2008, Shanghai by Dr. Klaus Grabinski Presiding Judge, Duesseldorf District Court

Assessment of damages in IP Litigation 2 I.Two-step IP infringement litigation on the merits: –First litigation: Ascertain whether there is an IP infringement If yes, the following remedies are available: –injunction –corrective measures »recall, removal, destruction –supply of information –declaration that the infringer is liable for damages –reimbursement of legal costs

Assessment of damages in IP Litigation 3 –Second litigation Proof and assessment of the amount of damages incurred by the IP holder or an exclusive licensee due to the IP infringement: –order to pay damages –reimbursement of legal costs

Assessment of damages in IP Litigation 4 II.First IP infringement litigation on the merits Before specialised divisions at 12 District Courts for patent infringement cases Average duration of a patent infringement case before District Court: about 1 year.

Assessment of damages in IP Litigation 5 1) Final Injunction: Order to cease and desist Objective: –to prevent an imminent patent infringement or to cease a continuing patent infringement Requirements for an injunction: –Entitlement of the plaintiff –Validity of the patent –Defendant‘s product/process falls under the patent‘s scope of protection, Art. 69 EPC –Imminent danger of an infringing act or at least one infringing act commited by the defendant in the past –No defence (e.g. exhaustion, prior user‘s right, Anti-Trust law, etc.) available Non compliance with the injunction –subject to a penalty payment or penalty imprisonment

Assessment of damages in IP Litigation 6 2) Corrective measures: Corrective measures encompass: –Recall from the channels of commerce –Definitive removal from the channels of commerce or –Destruction –of the infringing product and –the materials and implements used in the creation or manufacture of those products –at the expense of the infringer Objective: –to prevent infringing products to enter or to move within channels of commerce Requirements for a corrective order: –Entitlement of the plaintiff, validity, scope of protection, commitment of an infringing act by the defendant, no defence –Proportionality (seriousness of the infringement, remedies ordered, interests of third parties) shall be taken into account

Assessment of damages in IP Litigation 7 3) Right of information Order to provide the entitled person with... : –Names and addresses of the producers, manufacturers, distributors, suppliers and other previous holders of the infringing products as well as intended wholesalers and retailers –Information on the quantities of the produced, manufactured, delivered, received or ordered as well as the price obtained for the infringing products Objective: –to find out about the origin and the distribution networks of the infringing product Requirements for an order to provide information: –Entitlement of plaintiff, validity, scope of protection, no defence

Assessment of damages in IP Litigation 8 –Proportionality Additional Information: –According to German law the entitled person has an additional right of information with regard to »the defendant‘s production costs giving the individual cost factors and »the profit obtained. Objective: –to enable the patent holder to calculate the profit of the infringer (see damages) Requirements: –(See damages, file 9)

Assessment of damages in IP Litigation 9 Execution: –Non-compliance with the order to give information is subject to coercive payment or imprisonment. Diligence: –If there is reason to believe that the information has not been given with the necessary diligence (e.g. the information is not true, not complete, contradictory, etc.) the patent owner can require the infringer (normally the CEO of the infringing company) to give the information under oath. –If it then turns out that the information is not true, the infringer can be punished for criminal offence.

Assessment of damages in IP Litigation 10 4) Declaration that the infringer is liable to pay damages Objective: –to interrupt the running of the period of limitations Requirements: –Entitlement of plaintiff, valid patent, scope of protection, infringing act, no valid defence –Infringer has to be engaged in the infringing activity knowingly or with reasonable grounds to know. (Normally affirmed by the court, when the infringer is the producer of the infringing product or is a distributor specialised in the particular field of technology.) –Where the infringer did not knowingly, or with reasonable grounds know, engage in infringing activities, the court orders a compensation for unjustified enrichment, which means that the infringer has to pay a reasonable royalty.

Assessment of damages in IP Litigation 11 5) Legal Costs -Court orders that legal costs and other necessary expenses of the successful party are borne by the unsuccessful party. -Legal costs include court fees and lawyer‘s and patent attorney‘s fees, but only to a statutory extent. -The statutory fees are listed in a schedule based on the value of litigation of the individual case. -Average value of litigation of a patent infringement case: between – ,-- €.

Assessment of damages in IP Litigation 12 III.Second IP infringement litigation In most infringement cases the parties settle the case with regard to the calculation of damages when there is a final decision on IP infringement. Only if they do not succeed insofar the patent holder files a second action for payment of damages. The court has discretion in assuming and calculating damages after considering all relevant facts, sect. 287 (1) German Code of Civil Procedure

Assessment of damages in IP Litigation 13 3 methods of calculating damages –Return of profit made by the infringer –Reimbursement of lost profits incurred by the infringed party –Payment of a reasonable royalty (licence analogy)

Assessment of damages in IP Litigation 14 1) Lost profits: a) General: The infringed patent holder can claim to be reimbursed for the loss of profit he suffered as a result of marketing the infringing product, sec. 251 (1) Civil Code. –As a rule, the burden of proof lies with the patent holder. –Facilitation of burden of proof: Such profits are deemed to be lost that can probably be expected in the normal course of affairs or under special cirumstances, and in particular in accordance with the arrangements and provisions made, sec. 251 (2) Civil Code.

Assessment of damages in IP Litigation 15 b) Causation: According to the normal course of matters it has to be expected with probability that the lost profits claimed were caused by the IP infringement. How to prove? An example: –The infringed patent concerned the construction of a power plant. Patent holder, patent infringer and a third company were in competition for construing the plant. The patent infringer won and realized the construction by infringing the patent. Would the patent holder have been ordered to carry out the construction if the infringer had abstained from the infringement? How to prove this allegation? By hearing the sales people from the patent holder or the infringer? By hearing a court appointed expert? By hearing the purchase people from the power plant?

Assessment of damages in IP Litigation 16 c) Calculation of lost profits: Lost profits can result from: –lost sales (sales the patent holder would have made, if the infringer had abstained from infringing actions) –price reductions (price reductions the patent holder was compelled to concede in order to match the infringer‘s prices), loss of prestige (because of bad quality of the infringing product) The prejudiced IP (e.g. patent) holder has to reveal details of his proceeds in order to allow a sufficiently precise assessment of the lost profits. In case the defendent disputes the alleged profits the court may order that a court appointed expert (normally a certified accountant) examines the cost structure of the IP holder‘s company.

Assessment of damages in IP Litigation 17 2) Return of infringer‘s profits: a) General: Reclaiming the profit made by the infringer is an alternative way to compensate the prejudiced patent holder. This method has been accepted for long but became popular only a few years ago after a landmark decision of them German Federal Supreme Court (145 BGHZ 366, 2001 GRUR 329, IIC 900 (2002) – Share of Overheads).

Assessment of damages in IP Litigation 18 In favour of the IP holder it is presumed that he could have made the same profit achieved by the infringer. The infringer is treated as if he had persued the production and sale of the infringing object as the prejudiced IP holder‘s managing director on the basis of a management without mandate (Federal Supreme Court – Share of Overheads).

Assessment of damages in IP Litigation 19 b) Computing loss of profits: –General formula: profit = sales – costs –Sales: protected product non-protected product which is sold due to the sell of the protected product (not due to other reasons like e.g. exploitation of business relationship between infringer and customers or a reduced price for the purchase of the protected and the non- protected product)

Assessment of damages in IP Litigation 20 –Costs: As a rule, only variable costs of the manufacture and the marketing of the infringing product can be deducted from the proceeds achieved. No global deduction of pro-rata overheads. Overheads may only be deducted if and to the extent that they can in exceptional cases be directly ascribed to the infringing object. The infringer bears the burden of submission and proof. The infringer shall not retain a contribution margin to his fixed costs. (German Federal Supreme Court, Share of Overheads).

Assessment of damages in IP Litigation 21 b) Causation The profit from the infringement is only to be surrendered to the extent that it is based on the infringement (Federal Supreme Court – Share of Overheads). It has to be assessed by the trial judge which factors did influence the purchase decisions of the customers and what is the share of the sales that is due to the use of the infringed IP ( Federal Supreme Court, 2007 GRUR 431 – Steckverbindergehäuse, Düsseldorf Court of Appeal – Lifter).

Assessment of damages in IP Litigation 22 –Assessing the share of the proceeds due to the infringement of an IP may get difficult in the following kind of situation: In case of a patent infringement: The patent concerns only a part of the entire product sold on the market, The product sold on the market makes use of several IP rights (technical or design), In case of a patent infringement when the product is sold under a famous brand or company name. In case of a trademark infringement a rough estimation is possible (Federal Supreme Court, – I ZR 322/02 – Noblesse)

Assessment of damages in IP Litigation 23 3) Reasonable royalty: A reasonable royalty is a safe and comfortable way to get compensation for the incurred damages A reasonable royalty can be claimed by a patent holder who is not exploiting the patent himself and, therefore, cannot claim lost profits. The patent infringer has to pay the royalty that would have been agreed for a licence by reasonable contractual partners if they had known the situation at the end of the infringement period. A penalty surcharge is not permissible.

Assessment of damages in IP Litigation 24 Indications for determining the rate of a reasonable royalty may come from –existing licence agreements –reports dealing with licence fee regularily payed in the respective branch of industry –the case law of the courts and the arbitration board at the German Patent Office dealing with employee inventor compensation –the opinion of a court-appointed expert The entire market value can become the basis for determining the reasonable royalty provided reasonable parties would have made such an agreement. If the entire market value is taken as a referential basis for determining the royalties the rate will normally be lower as if only the value of the protected item is taken.

Assessment of damages in IP Litigation 25 IV.Preliminary Injunction 1)General on preliminary injunction: –Definition: Court order to forbid the alleged infringement of a particular patent on a provisional basis –Objective: to prevent an imminent patent infringement or to cease a continuing patent infringement. –Non compliance with the preliminary injunction is subject to a penalty payment or penalty imprisonment in order to ensure compliance.

Assessment of damages in IP Litigation 26 2)Frequency: –relatively rare in patent infringement cases (less than 10 % of all patent infringement cases at the Düsseldorf District Court) –more often in trademark infringement or unfair competition cases

Assessment of damages in IP Litigation 27 3) Requirements for the issue of preliminar –obviousness (= „sufficient degree of certainty“, Art. 9 (3) ED) of entitlement of the applicant e.g. applicant is the registered patent holder or applicant submits an exclusive licence agreement with the registered patent holder) –obviousness of patent infringement or an imminent patent infringement e.g. technology is not very complex, infringement can be proven without expert opinion

Assessment of damages in IP Litigation 28 –obviousness of patent validity e.g. patent has been maintained in an opposition or nullity proceeding –urgency e.g. according to German case law the applicant should submit his application for a preliminary injunction in due course (generally about 2 months) after having taken notice of the allegedly infringing act.

Assessment of damages in IP Litigation 29 4) Proceedings –District Court decides whether to grant an ex-parte or an inter-partes preliminary injunction In German practice ex-parte preliminary injnctions are rarely granted in patent infringement cases (normally only in product piracy cases). As a precaution defendant may lodge a protective letter. If an ex-parte preliminary injunction is exceptionally granted, defendant can file an appeal. The Court will then set a one and only hearing after which the court hands down a decision. The decision can be appealed.

Assessment of damages in IP Litigation 30 –If no ex-parte injunction is granted, upon request of the applicant, a one and only oral hearing takes place about two months after the submission of the complaint. –The final decision will be handed down regularily within three weeks after the hearing. –The decision can be appealed. –Revocation of provisonal measures upon request of the defendant if the applicant does not institute, within a reasonable period determined by the Court upon request of the defendant, proceedings leading to a decision on the merits of the case before the District Court. –Preliminary measures can be made subject to the lodging by the applicant of adequate security