Historically, when it came to the enforcement of Intellectual Property (“IP”) rights in the European Union (“EU”), local rules applied.  In the context of enforcement rules, the remedies available for infringement were quantified by reference to the rules of the jurisdiction in question, which often differed amongst Member States.  The primary purpose of the EU IP Enforcement Directive (2004/48/EC) was to create a level playing field for the enforcement of IP rights across the Member States by establishing a homogenised set of enforcement measures. 

The changes brought to national IP regimes by the Directive have not been viewed as controversial.  However, its implementation has not been entirely clear-cut as c. 50 percent of the Member States missed the 29 April 2006 deadline for transposition.  Further, absent the establishment of a centralised system of litigation (e.g., Community Patent or EPLA) the enforcement measures set out in the Directive are subject to interpretation by national courts.  These courts may take divergent views as to the meaning of undefined terms and the methodology used to quantify the broadly defined damage remedies set out in the Directive, which is contrary to the primary objective of a level playing field.  In addition, implementation of the Directive is likely to bring some interesting changes to some of the more established damage regimes, including those in the UK and France.    

This article considers the challenges presented by the implementation of the Directive and its potential impact on the quantification of IP damages, and considers potential changes to the damage framework in the UK and France, which may be of interest.   

ARTICLE 13:  THE IMPACT OF UNDEFINED TERMS

The quantification of damages arising from infringement is set out in Article 13 of the Directive, which states that:  

Article 13 introduces undefined terms that will require interpretation by national courts, including the impact of known versus unknown infringement and the meaning ascribed to terms such as “unfair profits” and “moral prejudice”.  Until clearer definitions are provided, it is difficult to assess the economic impact of these terms on the quantification of damages.  However, it is safe to say that these terms provide an additional layer of uncertainty to the quantification of IP damages. 

INTERPRETATIONAL DIFFERENCES:  YOU SAY TOMATO, I SAY TOMATO

The broad definition of damage remedies (e.g., lost profits, unfair profits, royalties) set out in Article 13 of the Directive is subject to legal interpretation, which may differ between national courts.  Interpretational differences that may impact the quantification and amount of damages may include (among others):  (1) the measure of profits (e.g., incremental, full absorption, accounting); (2) the method used to apportion profits between infringing and non-infringing elements; (3) the consideration of price erosion and ancillary sales; and (4) the treatment of design around costs in royalty calculations.  If these differences were to arise they could create national disparities in the amount of damages awarded.  As a point of interest, this is contrary to the primary objective of the Directive, which was to create a level playing field in the EU.   

To understand how the interpretation of a common set of damage rules could result in different damage awards, it is helpful to consider an example related to the quantification of damages by reference to an account of the defendant’s profits.  A key economic issue that may need to be addressed under this damage remedy is the apportionment of profits between infringing and non-infringing activities.  In the UK case Celanese International Corp. v. BP Chemicals Ltd [1999] R.P.C. 203 it was held that the apportionment of profits should be done by reference to the relative capital expenditures.  However, an alternative incremental approach notes that the apportionment of profits by reference to expenditures may not be appropriate in circumstances where, on a relative basis, the infringing technology adds more value to the total product than other elements.  Accordingly, the methodology adopted by the courts to apportion profits may impact the calculation of damages.  This issue is not just hypothetical.  As noted below, an account of the defendant’s profits is a new remedy in France.  Therefore, French courts may need to address the apportionment of profits, which could, in theory, differ from the English courts view. 

UK DAMAGE ELECTION:  THE END IS NEAR?

The UK Patents Act 1977 (as amended January 2005) required a claimant to elect between an enquiry as to damages and an account of the defendant’s profits.  Once this election was made the claimant was precluded from recovery under the alternative remedy.  However, Article 13 of the Directive indicates that when setting damages the court should consider both the claimant’s lost profits and any unjust profits made by the infringer.  This raises several questions that will likely impact the quantification of damages.  Firstly, has the UK damage election process in effect been eliminated through the implementation of the Directive?  Secondly, how will national courts decide between the award of the claimant’s damages or the defendant’s profits? 

DEFENDANT’S PROFITS:  NOUVEL EN FRANCE

Historically, an account of the defendant’s profits was not an allowable method of recovery under French law.  Implementation of the Directive in France will allow for the recovery of damages under this method.  From an economic perspective, the addition of this new method of recovery could, in certain instances, increase the amount of damages awarded to the claimant in France.   

SOME FINAL THOUGHTS

Many of the challenges presented by the implementation of the Directive and their economic impact on the quantification of damages are subject to interpretation by national courts.  Until additional court guidance is provided, an expert economist can assist the legal team and its client navigate the grey areas of the Directive as they relate to the quantification of damages.  An economic expert with experience in multiple EU jurisdictions can:  (1) provide financial and economic analysis of untested areas of case law by reference to judgements in other jurisdictions; (2) provide assistance with identifying, understanding and quantifying the impact of different interpretations of damage methodologies by reference to historical case law; and (3) provide guidance on the mechanics and components of a damage calculation.  A reliable quantification of IP damages requires the effective integration of economics and law.  Sometimes the most important step in this process is understanding the devil in the detail.