Buyer beware: new patent rights in Japan

Kenji Tosaki of Nagashima Ohno & Tsunematsu examines a recent High Court opinion which should make it easier for foreign companies to recover damages against rights infringers in Japan

On February 1 2013, the Grand Panel of the Intellectual Property High Court of Japan (IPHC) rendered an opinion in a patent infringement case in which the calculation of the amount of damages was disputed. It is the sixth grand panel opinion since the Grand Panel of the IPHC was created in 2004. The opinion is a very important decision which should facilitate patentees' actions. The opinion has enabled patentees to recover more money from infringers, meaning the economic value of patents will be evaluated more highly. In the case, the amount of damages the plaintiff is entitled to recover was approximately ¥20 million ($208,400) under the view of the court of first instance, but was approximately ¥150 million under the view of the IPHC.

A patent infringement is categorised as a tort under the laws of Japan. Thus, theoretically, the amount of damages recoverable by a patentee in a patent infringement case should be calculated under the principles in the field of tort law. Under Japanese tort law, patentees are required to prove that they incurred losses to a certain amount and that there is reasonable causation between the defendant's actions that infringe the patent and the losses, in order to prove the amount of their recoverable damages. In Japanese civil litigation, parties are required to prove a fact to the extent that the court believes that fact with certainty. In other words, the burden of proof in Japanese civil litigation is much higher than simply the preponderance of evidence.

In patent infringement cases, however, it is difficult for a patentee to prove, as a fact, the amount of damages to the extent that the court believes that fact with certainty: it is not certain that the patentee's products would have been sold had the defendant's product not been sold.

To solve this difficulty in proving damages, the Patent Act of Japan provides three ways of calculating damages that patentees are entitled to recover. First, article 102(1) provides that a patentee is entitled to recover damages in the amount calculated by multiplying the number of the infringing products that the infringer sold in Japan by the profit rate that the patentee gains from the sale of the patented product. Second, article 102(2) provides that a patentee is entitled to recover damages in the amount of profit gained by the infringer from the infringement, for example the sale of the infringing products. Third, article 102(3) provides that a patentee is entitled to recover damages in the amount corresponding to reasonable royalty.

The main issue in the case that the IPHC focused on was whether article 102(2) can be applied to the case where the patentee does not practise the patented invention in Japan.

The main position in this issue is that the patentee needs to be practising the patented invention to be entitled to the calculation of the amount of damages under article 102(2) (the negative position). This position is founded on the view that the scope of the patentee's interest protected by a patent right extends only within the scope of the patented invention.

On the other hand, some scholars take the position that the patentee is entitled to the calculation of the amount of damages under article 102(2) in a case where the patentee is practising technology that contends with the patented invention (the positive position). This position is founded on the view that article 102(2) is the provision under which there is a presumption of the amount of lost profit, and that the patentee would have sold its products had the defendant's product not been sold in the case where the patentee is practising technology that contends with the patented invention.

Many court precedents have taken the negative position. On the other hand, only a few court precedents have taken the positive position. One such precedent is an opinion rendered on April 12 2000, by the Kanazawa Branch of the Nagoya High Court. In this case, the plaintiff owned a patent under which the patented invention was one regarding a method for producing tranilast, a new compound for treating allergies. Here, the plaintiff filed a complaint against pharmaceutical companies.

The court stated, in summary, first that since the plaintiff and all the defendants produce and sell tranilast, each product of which has a separate trade name, and the plaintiff's products compete with the defendants' products in the market, the sale of tranilast by the defendants directly precludes the plaintiff from the sale of tranilast. Therefore, the plaintiff suffered damages (loss of profit) which are the decrease of the plaintiff's sale of tranilast caused by the defendants' infringement: their sale of tranilast. Thus, even if the plaintiff does not practise the patented invention to produce tranilast, article 102(2) applies to this case.

Another precedent is an opinion rendered on August 27 2009 by the Tokyo District Court. In this case, the plaintiff owned a patent under which the patented invention was one regarding adsorbents for the oral administration for the treatment of kidney diseases and liver diseases, and the plaintiff filed a complaint against a pharmaceutical company. Here, the court stated that, in summary that there was no reason to believe that the loss of profit caused by the infringement occurs only when the patentee is practising the patented invention. In the case where the patentee would have made a profit had the infringement not occurred, article 102(2) should apply. In this case, the plaintiff would have made a profit had the infringement not occurred because: (i) the defendant's product is a generic product corresponding to the plaintiff's product and does not generate any new demand; (ii) the defendant's product competes with the plaintiff's product in the market for drugs for kidney diseases and scrambles for the market share with the plaintiff's product; (iii) the market share of the plaintiff's product in the market of spherical activated carbon as a drug for kidney diseases is high; and (iv) there is no evidence to support the situation that, if the defendant's product had not existed, other generic products, instead of the plaintiff's products, would have been sold. Therefore, article 102(2) applies to this case.

The plaintiff is a UK manufacturer of goods for children, including babies, which is a patentee of a Japanese patent for a waste storage device. The defendant, a Japanese manufacturer and distributor of childcare goods and toys, entered into a distribution agreement in 2003 for the defendant to sell the plaintiff's products in Japan. The distribution agreement was terminated in 2008.

The plaintiff and Combi Corporation, a Japanese manufacturer and distributor of childcare goods and toys, entered into a distribution agreement in 2008. Combi imports products that are covered by the patented invention manufactured by the plaintiff and sells them in Japan. According to the finding of facts by the court, the defendant imports products that are covered by the patented invention and sells them in Japan.

The plaintiff filed a complaint seeking an injunction as well as the recovery of damages under articles 102(2) and/or 102(3).

The Tokyo District Court held that the patentee needs to be practising the patented invention to be entitled to an award of damages in the calculation of the amount of damages under article 102(2) and denied the application of article 102(2) to the case.

The court held that, based on the finding of facts, the application of article 102(2) of the Patent Act should not be eliminated in calculating the amount of the plaintiff's damages because there is a circumstance that, if the defendant's infringement had not occurred, the plaintiff would have made a profit.

The plaintiff argued that, in light of the principle of territoriality, the application of article 102(2) of the Patent Act should be eliminated because the plaintiff does not practise the patented invention in Japan.

Whether the patentee is practising the patented invention should not, however, be a requirement to apply article 102(2) because the language of article 102(2) does not indicate that the patentee needs to be practising the patented invention, and it would be unreasonable to impose a particularly strict requirement to apply article 102(2) in light of the fact that its purpose is to reduce the difficulty in proving the amount of damages; also, article 102(2) is a presumptive provision.

As stated above, the application of article 102(2) of the Patent Act should apply in the case where there is a circumstance that, if the defendant's infringement had not occurred, the patentee would have made a profit.

Therefore, article 102(2) should apply to the present case regardless of whether the plaintiff's actions falls under the "practice" [of the patented invention] set forth in article 2(3) of the Patent Act. Such interpretation does not contradict the principle of territoriality because it does not extend the effect of the patent right to outside of Japan.

Article 102(2) of the Patent Act presumes the amount gained by the infringer from the infringement, for example the sale of the infringing products, which is to be the damage incurred by the patentee, in particular, the lost profit incurred by the plaintiff/patentee by the decrease of the sale of plaintiff's/patentee's products. As the IPHC stated, the purpose of article 102(2) is to reduce the difficulty in proving the amount of damages incurred by the patentee. Article 102(2) is justified by the rule of thumb that, if the infringer had not infringed the patent and had not sold the infringing products, consumers would have purchased the patentee's products instead of the infringing products, and the patentee would have likely gained the profit by selling the patentee's products to the same extent as the amount as the infringer gained.

It appears that such rule of thumb would apply in the case where the patented invention is not exactly practised in the patentee's products, but the patentee's products compete with the infringing products in the market as well as in the case where the patented invention is practised in the patentee's products. In the case where the patented invention is not exactly practised in the patentee's products but the patentee's products compete with the infringing products in the market, consumers would have also purchased the patentee's products instead of the infringing products and the patentee would have gained a profit by selling the patentee's products.

On the other hand, as described above, scholars who take the negative position argue that the scope of the patentee's interest protected by a patent right extends only within the scope of the patented invention.

They seem to believe that, as article 102(2) is not a provision in the Civil Code that covers general tort law but a provision in the Patent Act that protects the patentee's interest within the scope of the patented invention, article 102(2) applies only to the protection of the patentee's interest within the scope of the patented invention. Under that theory, article 102(2) does not apply even when there is a circumstance that the patentee would have gained a profit by selling the patentee's products.

If, however, it is supposed that article 102(2) does not apply, the patentee must prove that the patentee incurred losses in a certain amount and that there is reasonable causation between the defendant's actions that infringes the patent and the losses in order to prove the amount of damages recoverable by the patentee to the extent that the court believes the fact with certainty.

As described above, in patent infringement cases, it is difficult for patentees to prove that the patentee's products would have been sold if the defendant's products had not been sold, to the extent that the court believes the fact with certainty.

Even though the provisions of the Patent Act generally protect the patentee's interest within the scope of the patented invention, the purpose of article 102(2) is to reduce the difficulty in proving the amount of damages incurred by the patentee and article 102(2) will not be sufficient protection for the patentee if the application of article 102(2) is limited to the case where the patentee is practising the patented invention. To interpret that article 102(2) extends to the case where the patented invention is not exactly practised in the patentee's products but the patentee's products competes with the infringing products in the market would be consistent with the purpose of article 102(2).

The IPHC opinion further extends the application of article 102(2) to the case where there is a circumstance that, if the defendant's infringement had not occurred, the patentee would have made a profit. It does not limit the application of article 102(2) to the case where the patentee's products compete with the infringing products in the market. It extends beyond the positive position and follows the opinion rendered on August 27 2009 by the Tokyo District Court.

This extension is consistent with the purpose of article 102(2). This interpretation would not unduly harm the infringer because article 102(2) is a presumptive provision. The infringer can prove that the patentee does not actually incur the damages in the same amount as the infringer gained and override all or a portion of the presumptive effect. It therefore seems that foreign companies' actions in Japan seeking the recovery of damages against infringers will be made easier and more effective by the IPHC opinion.

Since the IPHC has broadened the application of article 102(2), more interest will be focused on how and to what extent the infringer can override the presumption provided by article 102(2).

As article 102(2) is a presumptive provision, the infringer can override all of or a portion of the presumptive effect by bringing rebuttal evidence to prevent the presumption and override all of or a portion of the presumptive effect.

In the case, the defendant argued that (i) it is not the plaintiff but Combi that gains a profit from the sale of the plaintiff's products; and (ii) the plaintiff did not incur damages because the plaintiff and Combi entered into the agreement that provided the minimum purchase volume and compensation of the deficiency when the minimum purchase volume was not achieved, and that the presumptive effect should be overridden. The IPHC did not accept this argument on the ground that (i) it is not only Combi (but also the plaintiff) that gains a profit from the sale of the plaintiff's products because the plaintiff sells the plaintiff's products to Combi and Combi sells them to consumers in Japan; and (ii) there is no evidence to show that the plaintiff and Combi entered into an agreement that provided a minimum purchase volume and compensation of the deficiency when the minimum purchase volume was not achieved.

The opinion does not, however, mean that it is difficult to override the presumptive effect under article 102(2). The infringer can override the presumptive effect if the court does not believe, with certainty, that the patentee would have gained profit by selling the patentee's products in the same amount as the infringer gained by bringing rebuttal evidence. The infringer does not have to prove that the plaintiff does not actually incur damages in the same amount as the infringer gained to the extent that the court believes it with certainty because the patentee still owes the burden of proof. The infringer may demonstrate that, for example, that: (i) there are other strong products that compete with the patentee's products and the infringing products in the market; (ii) the patentee's profit arises only from the sale of the patentee's products because the patentee purchases the patentee's products from a subcontractor while the infringer's profit arises from both manufacture and sale of infringing products; and (iii) the plaintiff has to pay royalty to the patentee in the case where the plaintiff is a non-exclusive licensee.

In the case where a foreign patentee sells its products through a Japanese distributor, the infringer may be able to request a court order to disclose the patentee's profit from the sale of the patentee's products so that the court can distinguish the patentee's profit from the distributor's profit. In case where there are other strong products that compete with the patentee's products and the infringing products in the market, the infringer may submit evidence that shows that the other products have the same function as the patentee's products and the infringing products, and consumers recognise the other products as an alternative to the patentee's products and the infringing products. In any event, actions that the infringer can take to override the presumption are the same in the case where the patentee is practising the patented invention and where the patentee is not practising the patented invention.

Kenji Tosaki
		Nagashima Ohno & Tsunematsu Kioicho Building, 3-12, Kioicho, Chiyoda-ku Tokyo 102-0094, Japan T: +81-3-3288-7000 F: +81-3-5213-7800 E: info@noandt.com W: www.noandt.com Kenji Tosaki is a partner at Nagashima Ohno & Tsunematsu. His practice focuses on intellectual property litigation and transactions, particularly those related to patents. In addition, his practice includes complex litigation in other areas, such as securities litigations related to derivative products. He represents both Japanese and foreign clients in Japanese courts. He also advises Japanese clients involved in litigations in foreign countries. He graduated with an LLB from the University of Tokyo in 1996. He was admitted to practice law in Japan in 2008. Before he joined Nagashima Ohno & Tsunematsu, he worked as an associate judge at Japanese courts from 1998 to 2002 and from 2004 to 2008 and for the Financial Services Agency of the Government of Japan from 2002 to 2004. He studied at Southern Methodist University School of Law from 2001 to 2002 as a visiting scholar.

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