An International Guide to
Patent Case Management for Judges

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7.7.2 Damages

The act of intentionally or negligently infringing the patent right of another person is deemed to be a tort. Accordingly, a patentee may claim damages under Article 709 of the Civil Code. The requirements for a finding of a claim for tort damages include:

  1. 1. an infringement of any right or legally protected interest;
  2. 2. an intentional or negligent act;
  3. 3. a causal relationship between (1) and (2);
  4. 4. damage; and
  5. 5. a causal relationship between (1) and (4).274

Article 103 of the Patent Act provides that an infringer of a patent right of another person is presumed to be negligent in the commission of the act of infringement. A person may reverse this presumption if they can prove there was no negligence. However, it is quite rare that the court finds that an infringer was not negligent. For example, relying on an outside counsel’s opinion erroneously concluding non-infringement or invalidity is not enough to prove there was no negligence.275

Given the complexity in proving patent infringement and resulting damage, once a patentee proves that damage has occurred, the Patent Act sets out a number of presumptions for the calculation of damages. Amounts for damages can only be compensatory. Japanese courts do not award punitive damages.276 Article 102 sets out three formulas to calculate the amount of compensatory damages: lost profits, infringer’s profits and reasonable royalty.

7.7.2.1 Lost profits

Article 102(1) provides that, if an infringer assigned products that constitute the act of infringement, the amount of damages may be presumed to be the total of the following two amounts:

  1. (i) the amount of profit per unit of the product(s) which would have been sold by the patentee […] if there had been no infringement, multiplied by the portion not exceeding the quantity (minus any quantity of products, circumstances due to which the patentee would have been unable to sell (“specified quantity”)) proportionate to the ability of the patentee […] to work the products (“working equivalent quantity”) within the quantity of products assigned by the infringer (“assigned quantity”); [and]
  2. (ii) the amount equivalent to the amount of money to be received for the working of the patented invention relating to the patent right […] according to the quantity in the case where there is a quantity that exceeds the working equivalent quantity within the assigned quantity, or a specified quantity (except when the patentee […] would have been able to establish an exclusive license or grant a non-exclusive license on the patent right […]). (emphasis added)

Article 102(1) had originally only included the lost profit formula set out in Article 102(1)(i) above. However, in a case where a patentee does not have the ability to work the products within the quantity of products assigned by an infringer, the patentee would not be able to recover damages in relation to that quantity. The infringer could thus enjoy the profit of such quantity. Such a situation was regarded as undesirable from the perspective of protecting patents by awarding reasonable compensation. Therefore, the provision was amended in 2019 (and came into force on April 1, 2020) to include Article 102(1)(ii), which effectively enables a patentee to claim lost profits for any infringing sales up to the patentee’s production capacity, and a reasonable royalty for any remaining infringing sales (see Section 7.7.2.3).

A Grand Panel of the IP High Court has clarified certain key terminology of Article 102(1)(i):

  • The “product(s) which would have been sold by the patentee if there had been no infringement” only needs to be a product of the patentee whose sales were affected by the infringement – that is, a product of the patentee having a competitive relationship with the infringing product in the market.
  • The “amount of profit per unit” is an amount of marginal profit obtained by deducting the cost additionally required in direct relation with the manufacture and sales of the aforementioned product for the patentee from the sales of the product of the patentee, and the burden of proof resides with the patentee.
  • Even if the patented invention is characterized only in a part of the patentee’s product that worked the patented invention, it is factually presumed that the total amount of the marginal profit obtained by the sales of the patentee’s product is the lost profit of the patentee. However, in circumstances where the portion of a product that is attractive to customers cannot be considered to contribute to all the profit earned by sales of the product by the patentee, the contribution rate may be reduced and deducted from the marginal profit.
  • The “ability (of the patentee) to work” by supplying the product that embodies the invention only needs to be a potential ability. If the patentee is able to supply the quantity of the patentee’s product corresponding to the sales quantity of the infringing product by means such as outsourcing its production, it is reasonable to construe that the patentee has the capability to work the invention. The burden of proof for showing such potential ability resides with the patentee.
  • The “circumstances due to which the patentee would have been unable to sell” prescribed in the provision to Article 102(1) of the Patent Act refers to circumstances that rebut a reasonable causal relationship between the infringement and the decrease in sales of the patentee’s product, and circumstances such as (i) the presence of differences in the business models or prices between the patentee and the infringer (difference of the subject market); (ii) the presence of competitive products in the market; (iii) the marketing efforts of the infringer (brand power and promotion activities); and (iv) the presence of differences in performance of the infringing product and the patentee’s product (functions, design and other features different from those of the patented invention). The burden of proof to demonstrate such aforementioned circumstances resides with the infringer.277
7.7.2.2 Infringer’s profits

Article 102(2) of the Patent Act provides that, if the infringer earned profits from the act of infringement, the amount of profits earned by the infringer is presumed to constitute the amount of damage sustained by the patentee or exclusive licensee.

A Grand Panel of the IP High Court found that “there should be a presumption under the paragraph for a total amount of profit (made by the infringer)” and that the “expenses which may be deducted from the sales of infringing products in order to calculate marginal profit are only any additional costs that were necessitated in direct relation to manufacture and sales of infringing products by an infringer.”278

Furthermore, the IP High Court has indicated that the following circumstances could either “rebut a reasonable causal relationship between profit gained by the infringer and damage caused to the patentee” or overturn the presumption:

  • the presence of differences in the business models between the patentee and the infringer (difference of the subject market);
  • presence of competitive products in the market;
  • marketing efforts of the infringer (brand power and promotion activities);
  • the performance of infringing products (functions, design and other features different from those of the patented invention); and
  • when “a patented invention is implemented for only a part of the infringing products.”279
7.7.2.3 Reasonable royalty

Article 102(3) of the Patent Act provides that a patentee may claim compensation for damage sustained as a result of a negligent infringement of a patent, by regarding the amount the patentee would have been entitled to receive for the working of the patented invention, that is, an amount equal to a hypothetical reasonable royalty, as the amount of damage sustained.

A Grand Panel of the IP High Court held that a reasonable royalty rate for an infringement should be determined by taking into account a number of circumstances such as:

  • the royalty rate set in license agreements for the patented invention, or if there are no license agreements, a comparable royalty rate in the industry;
  • the value of the patent, that is, the technical contribution or significance of the patented invention, and whether it may be substituted with alternative technology;
  • contributions to sales and profit when the patented invention is used for products, and the manner of the infringement; and
  • the competitive relationship between a patentee and an infringer, as well as the business policy of the patentee.280
7.7.2.4 Matters the court may take into consideration

Article 102(4), which was amended in 2019,281 provides that, when a court is determining a reasonable royalty as provided for in Article 102(1) and (3), the court “may take into consideration compensation which the patentee would obtain if the patentee agreed on the compensation of the working of the patented invention relating to the patent right with the infringer on the premise that the patent right had been infringed.”

In both of the Grand Panel cases cited in the two previous sections, the IP High Court used a framework that allowed the amount of damages to be reduced in two steps by taking into account:

  • the degree of contribution of the patent to the infringing product’s value; and
  • other circumstances, in relation to both Article 102(1) and (2).

Under Article 102(5), when an infringer has infringed a patent right without intention or gross negligence, the court may also take these circumstances into consideration when determining the amount of damages. Further, a patentee may claim attorney’s fees as damages under Article 709 of the Civil Code.