The economic consequences of the UPC: the calculation of the award of damages of a patent infringer under UPC rules

The way how to claim for a damage at the UPC

The legal basis for an award of damages is Article 68 of the Unified Patent Court Agreement (“UPCA”) which is based on Article 13 of Directive 2004/48/EC, the Enforcement Directive. Potential patent owners claiming for damages at the UPC do not have to start proceedings in multiple member states, which causes high costs and the claimant has to deal with many rules in different jurisdictions. Now, damages for an infringed patent portfolio can be claimed for the entire territory within one case at the UPC.

The current 24 member states comprised an economic performance of 13.8 billion Euro last year.

Depending on the countries covered by the infringed patents, this might cause a relevant economic impact on patent owners (and infringers). Damages for patent infringements in the pharmaceutical industry, just to mention one example, might reach considerable volumes.

Obviously inspired by several jurisdictions, the Rules of Procedure of the UPC (“RoP”), which serve to complement the UPCA, enables different ways of claiming for damages: damages can either be determined in the infringement proceedings at the UPC directly or – as for example in German infringement proceedings – in a separate damage proceeding as a second step.

How these two options are used will probably become clearer in the next years and upcoming cases at the UPC. However, those options are not that just black and white: according to Rule 119 RoP, the UPC may order an interim award of damages to the successful party in the decision on the merits, which shall at least cover the anticipated costs of the procedure for the award of damages and the compensation on the part of the successful party.

In addition, expected damages might be part of the first proceeding from a tactical point of view. In Germany, for instance, it can be observed, that expert opinions with damage calculations are already part of a first proceeding to introduce the question of potential damages rather early in the process. This might support settlement agreements without starting a second proceeding when discussing about a reliable estimate of a damage volume.

Guidelines of the UPC for award of damages

According to Article 68 UPCA the court can, at the request of the injured party, order the infringer who engaged in a patent infringement activity, to pay the injured party damages.

Hereby, the UPCA distinguishes basically between two cases: firstly, the damages that have to be paid to the injured party by an infringer who knowingly, or with reasonable grounds to know, engaged in patent infringing activity. The injured party shall – to the extent possible – be placed in the same position it would have been if no infringement had taken place (Art. 68 (2) UPCA). This rule seems to be a similar idea to what we have in several jurisdiction in damage calculations, i.e. to create a counterfactual scenario. Nevertheless, according to Art. 68 (2) UPCA the infringer shall not benefit from the infringement. Under a damage claim at the UPC, damages shall not be punitive.

Secondly, in the case that the infringer did not knowingly, or with reasonable grounds to know, engage in the infringing activity, the UPC may order another path for the compensation of damages incurred by the infringement, i.e. the recovery of profits of the payment of compensation (Art. 68 (4) UPCA).

This distinction between the knowledge of the infringer, that can be made under the UPC, seems to be rather new for some jurisdictions and has obviously a direct impact on how to calculate a damage from case to case.

Methods to calculate a damage claim under the UPC

For the calculation of a knowingly or with reasonable grounds to know engaged infringer, the award of damages shall take into account all appropriate aspects for the calculation of damages, such as the negative economic consequences, including lost profits, which the injured party has suffered and any unfair profits made by the infringer (Art. 68 (3a) UPCA).

According to Art. 68 (3b) UPCA alternatively – in appropriate cases – the damages may be set as a lump sum on the basis of elements such as at least the amount of the royalties or fees which would have been due if the infringer had requested authorization to use the patent in question.

By reading Art. 68 (3) UPCA it seems that there is no choice between the method to calculate lost profits and the infringer’s profit. It is up to practice whether and to what extent profits lost by the patentee and unfair profits made by the infringer will be combined in a damage calculation at the UPC. The most common used method, the relief-of-royalty, method is not mentioned in Art. 68 (3a) UPCA as one of three methods and how we usually see the methods in other jurisdictions. But this approach seems to be an alternative when reading Art. 68 3b UPCA.

In Germany, for example, the method of unfair profits made by the infringer is an appropriate calculation method and can in principle not be combined with the profits lost by the patentee.

Interesting from a valuation point of view is that “all appropriate aspects … such as the negative economic consequences” shall be considered. Negative consequences from an economic point of view could be – just to mention here a few of possible effects – a delay of an entry in the market, the loss of a first mover advantage or of clients, the loss to be technology leader, the damage of reputation or even to lose an investor or a financial source. For sure, the relevant aspects will depend on the infringed patent, the industry of the infringed patent and the case. However, this clause opens the award of damages to a broader view on effects on the business of the infringed party and its economic position in a broader sense.

In the second case referring to “appropriate cases” the Enforcement Directive suggests to cases in which it is difficult to determine the amount of the actual prejudice suffered. This Art. 68 (3b) UPCA also seems to refer to how damages are calculated in FRAND disputes as current market standard in the countries where courts already decide about the amount of FRAND conditions and compensation payments for past years. Beside that specific case of standard essential patents (SEPs), it seems that the relief-of-royalty method is the method to be used as an alternative to the probably more complex approach of the negative consequences the claimant suffered or the profits made by the infringer.

Although the RoP (see especially chapter 4 RoP) and also the UPCA seem to be quite detailed with the process for damage proceedings, it will be interesting to see how the UPC will decide in further details about the calculation approaches and how the mentioned economic aspects are considered. It is likely, that with increasing decision and thus creating ‘UPC case law’ further guidance on the different aspects and preferred methods will appear. In the current early stage of the UPC it might be expected that the local procedures of the presiding judges are likely to give the leading background in the first proceedings, where award of damages is or is part of the claim.

The assessment of damages might be based on the submissions of the parties only, or on the books of the defendant. Usually, the books of the defendant are the preferrable source for damages calculation, as they give more insight into the extent of the economic effects of the use and to financial information relating to the infringed patent. In that case, an application for the determination might include a request for an order to lay open books (Rule 126, 141 f. RoP). It will probably still remain the problem comparable to local damage calculations, how the information provided by the defendant can be used for the damage calculation. Nevertheless, the source is usually more usable for a damage assessment from the economic side, compared to public sources or the information given in the submissions from a more legal point of view.

Expert work at the UPC

Claims regarding damages will probably filed as written expert opinions in the proceedings. If evidence shall also be provided orally through the examination of experts, the party must apply for the hearing by bringing up particular reasons pursuant to Rule 181 of the RoP.

It is currently still not quite clear, how the oral hearing in such a case will actually happen. Local practices differ quite a lot.  At the current point of time, it seems to be rather unlikely, that – similar to English law procedures or under arbitration rules – a cross-examination will be adopted, but it seems that experts may be directly questioned.

When the judges of the UPC consider that the evidence presented by the parties in the dispute is not sufficient and additional evidence is needed, the appointment of a Court expert in accordance with Article 57 of the UPCA and Rule 185 of the RoP is possible. This seems to be inspired by local law like France or Germany. Court appointed experts must submit a written report to the Court, which the parties will have the opportunity to comment on pursuant to Article 57 UPCA. The Court experts may also, pursuant to Rule 186 of the RoP, be required to attend the oral hearing. If so, they must answer the Court and parties’ questions. If this will also be adopted for the damage calculation remains to be seen.

Conclusion

As for the whole proceeding damage claims at the UPC inherited several aspects parts of continental influence in litigation, but also inspired by aspects of Anglo-Saxon procedural rules. How the UPC cases in damage calculations in practice will proceed is expected to be influenced by the experience of the respective panel of the local judges and one foreign judge. The parties involved shall take this in their cases into consideration. Nevertheless, economic aspects have to be well considered under the UPC rules when claiming for award of damages.