Compensation for Infringement of Intellectual Property Rights
The holder of intellectual property (IP) rights is entitled to a variety of remedies for infringement of those rights. These include, an order for delivery (or destruction) of the offending goods, interdict (injunction) to restrain any further infringement, and damages or an account of profits.
This article focuses on the level of financial compensation available to holders of IP rights once they have established their rights have been infringed. There can be criminal sanctions for infringements of certain IP rights, such as those contained in the Trade Marks Act 1994, which include fines and imprisonment, and orders for forfeiture and confiscation under the proceeds of crime legislation. However, these are beyond the scope of this article.
The leading case in this area is General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd  1 WLR 819, in which the court gave guidance on the assessment of damages for the infringement of a patent, saying that:
- the court’s aim in awarding damages is to restore the injured party to the same position as they would have been in had they not sustained the wrong (in other words, damages are compensatory and not punitive); and
- the burden of proof rests with the party making the claim, but because the other side is the wrongdoer, damages should be assessed liberally.
How is the claimant’s loss assessed?
In the General Tire case, the court set out three measures of assessing loss:
- if the claimant exploits the patent by manufacturing and selling goods at a profit and the effect of the infringement has been to divert sales to the wrongdoer, the “measure of damages will … normally be the profit which would have been realised by the owner of the patent if the sales had been made by him”.
- if the claimant exploits the patent by granting royalty-bearing licences, “the measure of the damages he must pay will be the sums which he would have paid by way of royalty if, instead of acting illegally, he had acted legally.”
- if it is not possible to prove there is a normal rate of profit (as in 1), or there is a normal established licence royalty (as in 2), damages are assessed by working out what could reasonably have been charged for permission to carry out the infringing acts. Usually, the claimant will produce evidence to guide the court, such as expert reports, evidence from analogous trades or any other factor that assists the judge with deciding the loss.
Does this only apply to patents, or can these measures be used for other IP rights?
In subsequent cases, the courts have recognised that these principles are applicable in cases involving the infringement of IP rights generally, not just patent cases.
Causation and foreseeability
As is the case in other areas of the law, the recoverability of damages for infringement of IP rights depends upon you being able to show that the loss was: foreseeable; caused by the wrong; and not excluded from recovery by public or social policy. However, the wrongdoing or infringement does not need to be the only or dominant cause of the loss.
Damages for loss of manufacture and sale
Under this measure of damages, the holder of the IP right can claim:
- the lost profit on sales they would have made, had the defendant not exploited their IP;
- the lost profit on their own sales, if they were forced by the infringement to lower their own prices; and
- a reasonable royalty on sales by the defendant that the claimant would not have made.
Damages for loss of royalty
If the claim is made for loss of royalty, evidence that the claimant had actually offered a licence at a royalty rate that was rejected will not mean this is what the court will determine the rate to be. The court will assess damages objectively, taking into account any evidence of licences previously granted and at what rates.
For example, in a case involving infringement of copyright in song lyrics that involved Robbie Williams, the judge awarded damages on the basis of a 25% royalty share.
The ‘user principle’
The third method identified in the General Tire case is commonly known as the ‘user principle’. The court considers what the ‘willing licensor’ and the ‘willing licensee’ would have agreed, had a hypothetical negotiation taken place between the parties resulting in them entering into a hypothetical licencing agreement. When this method is used, all sales by the infringer are considered. A notional royalty figure that reflects the royalty that would have been demanded by the rights holder is then applied. This approach is designed to address injustice where the parties are not directly competing.
Copyright and the user principle
An attempt to argue that the user principle should not be applied in copyright infringement cases was rejected by the Court of Appeal in Blayney v Clogau St David’s Gold Mines  EWCA Civ 1007, with the court saying the differences between the IP rights did not affect the consequences of the infringement.
In Blayney, the court awarded £27,964.88 in respect of lost sales and damages equal to a royalty of 5% of the net selling price for the remaining infringing sales. This equalled a further £8,314.60, but the court explained that figure was not justified by any specific calculation.
Trade marks and the user principle
It is not clear how easily the user principle sits in trade mark or passing off cases. The Court of Appeal, said it was “…by no means convinced that the “user” principle automatically applies in trade mark or passing-off cases”.
Despite this note of caution, in the case of 32Red plc v WHG (International) Ltd  EWHC 815 (Ch) the High Court of England and Wales assessed damages based on the user principle for infringement of the claimant’s trademark, “32Red”, through the use of the defendant’s domain name 32vegas.com.
32Red plc claimed that it should be awarded an amount equal to 30% of the net gaming revenue for 32Vegas casino for the period of infringement and six months thereafter. That would have worked out at around 5 million. In contrast, WHG International said an award of compensation of between £25,000 and £50,000 would be appropriate.
In awarding compensation of £150,000, equivalent to about 1-1.5% of the net gaming revenue, the High Court took the following factors into consideration: the actual strengths and weaknesses of the parties; the availability of a non-infringing alternative; and the option of rebranding.
A note of caution: evidential issues
Although the court has set out these general principles and ways of measuring loss generally, these claims can involve difficult questions of fact or estimation. A common issue in these types of claims is that the losses suffered by the innocent party are usually uncertain. This is because the losses often relate to income that the right holder might or could have generated had the infringement not occurred.
The court may also have to take into account events that are now expected to occur as a direct result of the wrongful action. This can involve weighing and assessing counterfactual scenarios, and can lead to a rough and ready calculation. This led one judge to remark that, “the restoration by way of compensation is… accomplished to a large extent by the exercise of a sound imagination and the practice of the broad axe”.
These cases will therefore involve the court considering hypotheticals, and hearing evidence of projected sales. Usually, a claimant will need to obtain expert advice to project the level of loss they have suffered because of the infringer’s actions. Of course, this can be a costly process as part of any claim.
Although damages are designed to be compensatory and not punitive, there are different methods applied to calculate them. Where there is infringing behaviour, unless it is a straightforward case of considering how much profit was lost because of the infringing activity, the court will often be required to speculate about what might have been. This will often involve instructing an expert to give evidence of the loss.
If your IP rights have been infringed, and you would like to discuss your options, please get in touch to see how we can help.
Link to article