1. What’s the damage? Financial remedies for infringement of IP rights
Licensing Executives Society
Mark Bezant 10 September 2003

2. IP infringement - financial remedies
Lost sales
Price erosion
Ancillary sales
Bridgehead damages
Gerber v
Lectra
Lost profits
Inquiry as to damages
and / or
Incremental profits
Reflect consequential benefits of licensing IP
Financial remedies - election
Reasonable royalty
Calculate infringer’s total profits
Tring v
Island Records
Account of profits
Allocate to IP
Hoechst Celanese v BP Chemicals

3. Inquiry as to damages Conceptual framework for IP infringement
Economics
- market analysis
- cost behaviours
Licensing/
valuation of IP
Accounting
cost allocation
cost measurement
Skills:
Price
Sales volumes lost to infringer?
Price erosion?
‘But for’
‘Actual’
Reasonable royalty on the rest of the infringer’s sales ?
Quantity
Infringer’s total sales

4. Inquiry as to damages - lost sales/ price erosion and market definition
In the blue corner
In the silver & yellow corner
Hoover’s Vortex range
Dyson’s Dual Cyclone
Head to head - nozzle to nozzle
© Deloitte & Touche.

5. Recovery of lost profits UK principles - Gerber v. Lectra
Ancillary damages
lost profits relating to sales of items which do not contain the patented item but are complementary e.g. spare parts, consumables or services sold with a product containing the patented item
provided these losses are consequential and foreseeable
Bridgehead damages (“springboard” damages/ accelerated market entry)
losses suffered post-infringement, including post-expiry of the patent, by the establishment of a market presence through infringement
Sales via subsidiaries
recovery of damages by patentee/ exclusive licensee
loss to parent (patentee) cannot be presumed to equal loss to subsidiary where sales occur via a subsidiary

6. Legal structure of groups - interaction with international commercial/ tax planning and implications for IP litigation
What happens if the company registered as the proprietor of the IP (IPCo) is not actually the entity in the group that suffered a loss following an infringement (OpCo)?
IPCo
OpCo
OpCo
HoldCo
OpCo
IPCo
OpCo
OpCo
IPCo

7. Recovery of lost profits UK principles - recent authority
Causation: patentee to prove that customer awarded a contract to the defendant because of a demand for the patented technology (Coflexip v. Stolt)?
point remains open following recent Court of Appeal decision
Recovery of damages for lost profits on non-patented items (SmithKline Beecham v. Apotex)
recoverable if natural and probable consequence of the infringement
includes ancillary sales
recovery subject to remoteness
UK becoming closer to US position (Rite-Hite v Kelley)?

8. Reasonable royalty - calculation of damages
Damages are assessed by reference to the royalty which would have been agreed between a willing licensor and a willing licensee (at the date of the first infringement)
Hypothetical (artificial?) situation by definition, no willing licensor or licensee
Approach seeks to provide claimant with fair compensation i.e. loss of licensing income, which should have accrued to the plaintiff as licensor
Royalty is that under a licence where licensor does not compete with licensee (because hypothetical licence relates to those sales the Court finds would not have been lost sales by the Claimant)
can’t assess royalty by reference to licensor’s profits qua manufacturer
No authority on the other terms of the hypothetical licence
unhelpful given that a licence royalty reflects the rights and obligations of the parties under the terms of the licence

9. Reasonable royalty may be assessed using a number of approaches - IP valuation
Royalty rates established by the claimant in similar circumstances (“comparables” approach)
adjust for differences
“preferred” approach in many cases (Copyright Tribunal)
Industry norms for licences for similar IP
“5% for patents?”
Allocation of economic benefits deriving from the use of the IP (“available profits” approach)
“25% rule”/ rule of thumb
no common ground as to measurement of profits?
allocation of available profits reflects relative contribution of parties to the licence and allocation of risk and reward
Cost of designing-around the IP
contrast with position assumed under UK law regarding lost sales, where the infringer can’t say that it, in the alternative to infringing, it could still have taken a sale from the Claimant by non-infringing means

10. Court-imposed royalties
Royalty rates acceptable to the parties (as “willing” licensor/licensee) may not overlap
Issue in both Catnic Components v Hill & Smith [1983] and Gerber v Lectra [1995]
Differences reflected different approaches to estimating profits available to pay a royalty
Catnic Gerber
Patentee Patentee’s profits on Infringer’s incremental
own sales [20%] profits including ancillary
sales [25%]
Infringer Estimated cost Infringer’s net profits,
savings using excluding ancillary sales
patented product [2.5%] [1% - 1.5%]
Court 10% %

11. Hoechst v BP - principles for an account of profits
Account cannot be determined by reference to incremental profits over those obtained by non-infringing means
Account cannot be less than nil (even if infringement reduced losses)
Profits calculated using defendant’s actual accounting and normal accounting principles
Total profits apportioned appropriately to the infringing aspect
exclude profits not caused by infringement
re-weight, if justified, to reflect relative merits of infringing aspect
=> Accounting perspective in contrast to economic perspective underpinning an inquiry as to damages

12. Account of profits Icing Laddie J’s cake The profit icing…
…evenly spread? Or weighted?
The whole project “cake”
The infringing slice

13. Election for remedies - your average gain or… …my incremental loss?
Account of profits
Their per unit profitability may well be higher if they are freeloading…
…but perhaps they did not recover their initial investment, if you nipped it in the bud
Any evidential battle will be on their turf
Damages
What proportion of their business would have been yours?
Do your incremental profits outweigh their average profits?
Will there be a lasting effect of their wrong acts?
Trade off: amounts v. evidential risks and costs

14. Heads of damage for trade mark actions
McGregor on Damages, 16th Edition
Past effects
Future effects
Loss of business profits caused by the diversion of the claimant’s customers to the defendant as a result of the defendant’s misrepresentation
Any loss of business reputation and goodwill of the claimant resulting from the infringement
Further loss of profits through reduction of the claimant’s prices in response to competition arising out of the defendant’s infringements 14

15. Reasonable royalty concept extended to copyright (and trade mark) cases
Blayney v Clogau St. David’s Gold Mines Ltd [2002]
“Given that is the rule in the case of infringements of patents I can see no reason not to apply it in cases of infringements of copyright. In each case the infringement is an interference with the property rights of the owner … Though the nature of the monopoly conferred by a patent is not the same as that conferred by copyright, I see no reason why that should affect the recoverability of damages in cases where the monopoly right has been infringed.”
Court of Appeal awarded 5% royalty
Reed v. Reed [2002]
“…it is necessary to hypothesise the willing licensor and licensee. The general principles applicable where the claimant cannot show an actual loss are described by Lord Wilberforce in a much-quoted passage in General Tire v. Firestone [1976] RPC Although a patent case, the principles are equally applicable to trade mark infringement.”

16. Interaction of different IP rights
Dyson v Hoover – the value of a springboard
The patent
For a period of 12 months following expiry of the patent – selling any Hoover Triple Vortex vacuum cleaner; or any other vacuum cleaner made in accordance with the invention (unless not designed/tested within the jurisdiction while the patent was in force)
Injunction granted
The trade mark
For a period of 6 months following the date of the order - marketing any vacuum cleaner under the trade mark VORTEX or by using the Triple Vortex logo (unless no likelihood of deception)
Injunction not granted no evidence Dyson would suffer from Hoover’s continuing use of the trade mark as a foreseeable consequence of the patent infringement

17. Closing comments
Increasing interaction of different classes of IP rights poses challenges
multiple drivers of demand
allocation of value
Filter out the noise
definitions of markets / channels (“head to head challenge”?)
positive evidence (e.g. customer reason for purchase decision) to eliminate other factors
Be aware of
legal structures (right to bring an action)
IP value “established” in tax filings, statutory accounts, transactions, performance management systems etc

18. Any questions? Mark Bezant mbezant@deloitte.co.uk
Now or later…
Mark Bezant
Tel: +44 (20)