Damage calculation at the UPC – Is it a change in methodology or is it a matter of interpretation?

Intention of an infringement as prerequisite?

What is new for some European jurisdictions but included in Article 68 UPC Agreement is the distinction for damage calculations if an infringer has knowingly, or with reasonable grounds to know, engaged in infringement and those who have not.

• If a wilful infringement shall be recognised, Article 68(2) UPC Agreement, aim to place the injured party in the same position they would have been if no infringement occurred. This situation shall entail a full compensation.
• In the case a non-wilful infringement occurred, Article 68(4) UPC Agreement considers a compensation that may be limited to the recovery of profits made by the infringer or a reasonable royalty.

This distinguishment will be interesting to observe in patent litigation. As there is a patent usually observable as soon as it is published, it seems to be difficult to argue that the infringement was not wilful. Nevertheless, a non-wilful infringement may occur for example in a complex technology that this is protected by a large patent portfolio, e.g. as it is often the case with Standard Essential Patents. It might also happen that a supplier does not comply with contracted full patent protection of the supplied parts, so a manufacturer in the value chain is faced with patent infringement accusations. Thus, the situation in which the infringement occurred must be examined before proceeding with a damage calculation.

“Full” compensation of an infringed patent owner

The typical three methods used for damage calculations that are observable in many jurisdictions are the lost profit compensation, infringers profit and the relief-from-royalty method. Although the UPC Agreement does not refer to these three methods directly, they are likely to be covered by the UPC Rules. From an economic point of view, Article 68 UPCA obviously gives a wider consideration of economic harms in case of a “wilful” infringement.

Damages differ from business model to business model and damages require individual assessments. A compensation could range from reimbursement of costs e.g. not only of the litigation, but for example costs of communication to inform clients. Compensation may also be required due to delayed market entry, loss of first-mover advantage, reputational damage, loss of clients, and the impact on financing terms, to name a few. This broad definition in the UPC Agreement encourages a holistic economic assessment tailored to the industry and usage of the patents of the infringed patent owner.

Even it seems that the damage award is a broader range compared to the typical relief-from-royalty compensation that can be observed in many European jurisdictions as the preferred method, a punitive element is clearly excluded under UPC rules.

Consequently, an economic analysis of the impact of an infringement is needed to clearly demonstrate that it is substantiated from a business point of view and not punitive.

Damage compensation in case of a non-wilful infringement

In the case of a non-wilful infringement, the UPC Agreement limits a damage compensation to the recovery of profits made by the infringer or a reasonable royalty. This regulation seems to refer that for the purposes of a damage calculation it has to be chosen between two methods, the infringers profit or the relief-from-royalty method. If this is really the intention of the UPC rules, this has to be observed in upcoming cases.

Economic Damages in the Context of Preliminary Injunctions

Additionally, the UPC framework presents particular challenges and opportunities concerning preliminary injunctions. This can be economically a severe measurement, especially with regard to the large market of the UPC member states. Nevertheless, in the case of a revocation of a preliminary injunction this raises complex damages issues: parties harmed by wrongful injunctions may pursue compensation.

Damage claims at the UPC – quo vadis?

Given the still early stage of the UPC and the anticipated development of UPC case law with regard to damage calculations and the methods to be applied, the practical conduct of damages proceedings will depend substantially on the expertise of presiding judges and the strategic choices of litigants. What can be stated already is, that substantiation of a damage claim in an early stage is crucial to be considered accordingly, which seems to be a change in damage proceedings at least for several member states participating in the UPC system – generally commented to have “front loaded” proceedings at the UPC. Thus, it seems to be imperative for parties to integrate economic considerations and local procedural nuances into their litigation and settlement strategies early enough to navigate this evolving landscape effectively.