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Methodologies for Calculating Damages on the Basis of Reasonable Royalties
To establish a legally reasonable remedy for damages to the patentee so that the burden of proof on the patentee is appropriately waived, the Patent Act added Subparagraph 3, Paragraph 1, Article 97 on December 21, 2011, reading "Damages suffered is recognized as equivalent to the amount of royalties that may be collected from exploiting the invention patent being licensed." With this amendment to the Patent Act, the patentee can use the method stipulated in said Subparagraph 3 to calculate damages claimed for patent infringement. Subsequently, said Subparagraph 3 was further amended on June 11, 2013 to read “The damages claimed may be calculated according to the amount calculated on the basis of reasonable royalties that may be collected from exploiting the invention patent being licensed.” Regarding calculation of damages on the basis of reasonable royalties, certain elaborations were given in the 2021 Min Zhuan Su Zi No. 48 civil judgment (hereinafter referred to as "the Judgment") rendered by the Intellectual Property and Commercial Court on June 29, 2022.
I. Summary of the Judgment
In this case, as the patentee of Taiwan Design Patent No. D208862, entitled "Frame Member" (hereinafter referred to as "the Patent ",) the plaintiff claimed that the defendant, who manufactured and sold the frame members, infringed on the Patent. According to Subparagraph 3, Paragraph 1, Article 97 of the Patent Act, the plaintiff presented the patent license agreement with a third party and requested that damages be calculated on the basis of reasonable royalties that could have been gained by licensing the Patent.
The Intellectual Property and Commercial Court ruled as follows.
In view of the contents of the patent licensing agreement, the plaintiff agreed to license the frame member design patent of Design Patent Application No. 108,307,991 and the Patent to a third party. Both parties mutually assented that the license period is five years, during which the third party may use and sell said frame member products in the territory of the Republic of China, as well as that the third party shall pay the plaintiff NT$1.8 million. As the plaintiff did license the two frame member design patents (including the Patent) to others, the monthly royalty amount is supposed to be NT$30,000 based on the preceding license period and calculation of royalties (NT$1.8 million divided by 5 years, and again by 12 months, equals NT$30,000). Since the preceding two patents licensed by the plaintiff are both design patents entitled “Frame Member“ and ought to have comparable value, the monthly royalty amount of the Patent should be NT$15,000 (NT$30,000 divided by 2 equals NT$15,000). Hence, it is admissible that the plaintiff took the aforesaid monthly royalty amount of NT$15,000 as the basis for calculating damages suffered, and requested for NT$180,000 (NT$15,000 multiplied by 12 months equals NT$180,000) from the defendant as damages for a compensation period of one year at least since December 24, 2010, when the IP firm assessed that the frame member in dispute infringed the Patent.
II. Rationale for the Patent Act amendment
As seen in the Judgment, based on the patent licensing agreement between the patentee and the third party, the amount of damages suffered by the patentee was recognized as equivalent to the royalties potentially received from licensing the Patent. However, the Judgment appears inconsistent with the rationale for Article 97, Paragraph 1, Subparagraph 3 of the Patent Act dated June 11, 2013, which clearly lays out that damages calculated on the basis of reasonable royalties should actually exceed the amount of the royalty provided by the license. The rationale for this amendment are as follows.
1. The calculation of damages specified in said Subparagraph 3 before the amendment was based on "equivalent to the amount of royalties collected from exploiting the invention patent being licensed." Such calculation could discourage infringer intent to obtaining the patent license first because damages calculated on the basis of reasonable royalties for patent infringement is the same as that determined by acquiring licensing in advance.
2. In German patent practice, calculation of damages by license analogy (die Methode der Lizenzanalogie) is utilized, but the amount calculated by the court in this manner exceeds that calculated on the basis of reasonable royalties. This is because, compared to operating under a common license, the infringer bears no additional costs under the license, such as the being subject to financial audit. Moreover, the patentee bears additional costs in infringement litigation, such as court costs and attorney fees. Consequently, damages calculated on the basis of reasonable royalties are intended to exceed the amount under licensing.
3. In addition, according to Paragraph 2, Article 139 of current German Patent Law, "the right to claim damages may be calculated on the basis (Grundlage) of reasonable royalties under license." The aforementioned provision also affirms that reasonable royalties from damages shall exceed the royalty amount under license.
III. Other relevant judgements
After the amendment to Subparagraph 3, Paragraph 1, Article 97 of the Patent Act on June 11, 2013, the award of damages to the patentee calculated in accordance with said Subparagraph 3 can be roughly divided into two types as follow.
1. Equivalent to the amount of royalties under the license
a. The court considered past licensing of the patent in dispute and royalties published on the website of the patentee, and calculated reasonable royalties requested by the patentee in proportion to the reduction of the royalties granted in the past. (2012 Min Zhuan Shang Zi No. 50 civil judgment rendered by the Intellectual Property Court on February 27, 2014.)
b. The court held that it was reasonable for the patentee to claim damages based on the daily royalty of the patent in dispute as agreed between the patentee and the third party, and to calculate damages based on the number of usage days of the infringing product (2017 Min Zhuan Su Zi No. 98 civil judgment rendered by the Intellectual Property Court on June 22, 2019.)
c. After originally licensing the product at a royalty of NT$10,000 per product, the patentee raised the amount to NT$20,000 per product for a third party who had infringed on the patent in the first place and obtained a license after a warning from the patentee. The court commensurately accepted a royalty amount of NT$20,000 as the basis for calculating damages. (2013 Min Zhuan Shang Zi No. 52 civil judgment rendered by the Intellectual Property Court dated April 10, 2014.)
2. Determination of reasonable royalties in accordance with the principle of balancing equities
Even though the patentee did not license the patent in dispute, and is therefore unable to generate an estimated royalty, the court may still determine appropriate and reasonable royalties in accordance with the principle of balancing equities. At its discretion, the court may take into account patent royalties for similar technology, characteristics and scope of licensing agreements based on infringement facts, market presence of the licensor and the licensee, contribution of the patent technology to profits or technology of the infringing product, market share of the infringing product, and the like. (The 2015 Tai Shang Zi No. 1343 civil judgment rendered by the Supreme Court on July 17, 2015.)
In the light of the noted judgements, it can be seen that the court is known to refer to actual royalties granted and often deems equivalent royalty amounts under license as reasonable royalties and for damages suffered by the patentee. If the patent has not yet been licensed and there is no actual royalty amount to reference, the court will then determine reasonable royalties at its own discretion, based on other relevant factors in accordance with the principle of balancing equities. However, if an equivalent royalty amount under license is directly determined as equivalent to damages suffered by the patentee, isn’t there any contradiction to the aforementioned rationale for the Patent Act amendment? Is it subjective and full of uncertainty if reasonable royalties are recognized in accordance with the principle of balancing equities? Such issues require further clarification through judicial practice.