Newsletter
Judgment Observation: Intellectual Property Court's View on Damages Calculation Method Based on Item 2, Paragraph 1, Article 97 of the amended Patent Act
The pre-amended Taiwanese Patent Act (Item 2, Paragraph 1, Article 85) provides that a patent owner may opt to calculate damages incurred based on "the profits earned by the infringer from the infringing acts" ("Total Profits Method"), and that if "the infringer fails to provide evidence demonstrating the costs and necessary expenses incurred from the sale and production of the infringing goods, the total income obtained from the sale of the infringing goods shall be regarded as the earned profits" ("Total Sales Income Method"). With regard to the application of the above-mentioned provisions, the judges of the Intellectual Property Court ("IP Court") have gradually come to a consensus. Most of the IP Court's judgments held the view that it is inappropriate to directly adopt the Industrial Profit Standards promulgated by the Ministry of Finance ("MOF"), and such a view is supported by Supreme Court Judgment No. 2011-Tai-Shang-1091. The IP Court has also held that the infringer should provide evidence of the costs and necessary expenses of its actions in order to calculate its gross profits, that such costs and expenses should be limited to manufacturing costs and the expenses directly incurred by the infringer from the sale of the infringing products, and should not include other fixed costs for the operation of the business, and that, if no proof is produced, the total income obtained from the sale of the infringing products will be considered the total amount of damages to be paid.
The amended Patent Act, which was passed on December 21, 2011 and became effective on January 1, 2013, has renumbered the above-mentioned provisions concerning the payment of damages as Item 2, Paragraph 1, Article 97. While the Total Profits Method was kept in the new provision, the Total Sales Income Method was deleted. The legislative intent of Article 97 states: "The pre-amended provision adopted the Total Sales Income Method, … the patent owner might be over-compensated by the damages amount thus calculated. Therefore, the latter part is deleted. Calculation of damages should be conducted on a case-by-case basis." Since such amendment has affected the calculation of damages and the allocation of burden of proof, patent owners and lawyers have shown their concerns after the implementation of such provisions.
It has been over one and a half years since the amended Patent Act came into effect. There have recently been several IP Court judgments that concern the application of Item 2, Paragraph 1, Article 97. Some still followed the above-mentioned consensus, while others used the net profits rate of the Industrial Profits Standards to calculate damages. A summary of these judgments is provided below:
l The infringer's obligation to provide evidence of the costs or necessary expenses
The IP Court's Judgments Nos. 2013-Min-Zhuan-Su-78 (January 2014), 2013-Min-Zhuan-Su-115 (April 2014), and 2013-Min-Zhuan-Su-69 (April 2014): when calculating the profits earned by the infringer in accordance with Item 2, Paragraph 1, Article 97 of the amended Patent Act, the IP Court used the sales price of the infringing product less the costs declared by the infringer to calculate the damages in each of these cases. However, these judgments did not closely analyze whether such costs were limited to the manufacturing costs and the expenses directly incurred by the infringer from the sale of the infringing product, or whether these costs may include other fixed costs for the operation of the business.
l Net Profits in the Industrial Profits Standards
On the other hand, the IP Court Judgment No. 2013-Min-Zhuan-Su-3 (December 2013) described the legislative intent and spirit of the latest amendment to the Patent Act in detail and reaffirmed that "infringement damages are only claimed to reimburse the loss actually suffered by the patent owner but not to further provide the patent owner with other benefit." The judgment further clarified that, although in the pre-amended Patent Act, the reversal of the burden of proof is legislated to alleviate the difficulty for the patent owner to prove his/her damages and the causation between the infringing acts and the damages, such legislation was not intended to enable the patent owner to enjoy over-compensation for its loss. Based on the above principles, this judgment clarified that the New Patent Act kept the "Total Profits Method" only to reduce the burden of proof imposed on the patent owner and to deter infringement and that damages should be calculated on a case-by-case basis.
From the principles rendered in such a judgment, it seems that the consensus reached by the IP Court judges (that the infringer should prove his/her costs or necessary expenses) is still applicable when calculating damages on a case-by-case basis. However, in the case mentioned above, the plaintiff and defendant agreed to adopt the Industrial Profits Standards promulgated by the MOF to calculate damages. But they could not agree on whether to adopt the Gross Profit Rate or Net Profit Rate in the Industrial Profit Standards. Because the defendant only manufactured and sold the infringing products, the judgment held that "all the revenue of the defendant was his/her income earned by manufacturing and selling the infringing products," that "all the business costs were directly related to the manufacture and sales of the infringing products," and that "whether or not the defendant had infringed the patent, such business costs would occur even if the patent owner manufactured and/or sold the infringing products by itself; therefore, such business costs should be deducted from the sales income. The deducted amount was the profits that the patent owner could have earned if there had been no infringing acts. Therefore, it is groundless for the patent owner to assert that the damages should be calculated based on the Gross Profit Rate of the Industrial Profits Standards. The damages should be calculated based on the Net Profit Rate of the Industrial Profits Standard." Such legal analysis seems to calculate the damages based on the "actual loss to the patent owner" and adopt the Net Profit Rate to calculate the damages because business costs would also have been incurred if the patent owner had manufactured and sold the products itself.
The IP Court's Judgment No. 2013-Min-Zhuan-Su-56 (May 2014) adopted the same rationale and the Net Profit Rate of the Industrial Profits Standards to calculate damages. It was also clarified in this judgment that "the MOF will annually promulgate the profit rate standards applicable to different industries, and use this rate as the basis for the collection of income taxes. The Industrial Profits Standards are determined based on a random survey in the market and comments from relevant industrial associations. In other words, such standards are determined based on statistics and experience. The IP Court may refer to such standards when calculating damages."
As seen from the above judgments, after the New Patent Act came into effect, there are currently three judgments calculating damages based on the costs or necessary expenses proved by the infringer, and two judgments that have analyzed the spirit of the amendment in detail and specified that the court may adopt the Net Profit Rate of the Industrial Profits Standards to calculate damages. Since these five judgments were made by the first instance of the IP Court, it is worth monitoring the development of these cases and possible future judgments made by the second instance of the court, and observing the new consensus reached by the IP Court.