Damage control

Sometimes, a case is not over even after it is lost. This is especially true when a defendant is found guilty of patent infringement but the amount of damages is not yet determined in the infringement ruling. It is then still time to continue fighting for damage control. And this can pay off, like in the present case, where the total damages award amounted to approximately 7% of what the plaintiffs requested. That is, if my math is correct because the ruling contains so many figures that it is quite easy to lose track.

An example of not-too-bad damage control.
An example of not-too-bad damage control.

The story started a while ago, more precisely in June 2005, when Hutchinson, owner of European patent No. EP 0691481 (on a connecting rod for vehicles), together with its subsidiary and licensee Paulstra, sued two companies, CF Gomma Barre Thomas and Paul Robert Industrie, for infringement of the patent. CF Gomma Barre Thomas entered insolvency proceedings later in the same year, so that the infringement proceedings continued against the court-appointed receiver. In 2007, after another infringement seizure, a third company was added as a defendant, namely Société des Polymères Barre Thomas (later renamed as Cooper-Standard France).

In June 2009, the Paris Tribunal de grande instance (TGI) declared the patent valid but rejected all infringement claims. Hutchinson and Paulstra appealed.

In October 2011, the Cour d’appel confirmed that the patent was valid but set aside the first instance judgment as far as infringement is concerned: claims 1, 2, 4 and 5 of the patent were held to be infringed. The appeal ruling appointed an expert for determining the amount of damages.

A cassation appeal was lodged, and the supreme court judges partly canceled the 2011 judgment, because the finding of infringement of dependent claims 2, 4 and 5 was not sufficiently reasoned. However, this partial cancellation left intact the main findings of the 2011 judgment – in terms of validity of the patent and infringement of the main claim.

This leads us to the second ruling by the Paris Cour d’appel in 2016, after the expertise, on the assessment of damages.

Not exactly a fun read – unless you are an accountant, that is. But an important one, as this is the point at which the lawsuit finally has an actual impact on the various companies’ finances.

The guidelines for the assessment of damages are set forth in article L. 615-7 of the Code de la propriété intellectuelle:

In order to assess damages, the court shall separately take into account: 

1. Negative economic consequences of infringement, including lost profits and actual losses incurred by the harmed party. 

2. Moral prejudice. 

3. Profits made by the infringer, including intellectual, material and marketing investment savings deriving from the infringement. 

However, the court can alternatively, upon request of the harmed party, award a lump sum as damages. This lump sum is greater than the amount of royalties which would have been due if the infringer had asked for the permission to use the right that it infringed. This lump sum can be in addition to the indemnification of the moral prejudice.

A first issue raised by the defendants was whether the above (current) provision was applicable or not, given that it was modified in 2014. In particular the notion of “intellectual, material and marketing investment savings deriving from the infringement” was not recited in the earlier version of the law.

The court replied that the current provision is indeed applicable since the 2014 modification in fact did not change anything and did not add a new damages count; it is simply more explicit than the previous one.

A second issue was the definition of the perimeter of the infringing goods. Four models of connecting rods were mentioned in the infringement seizure reports of 2005 and 2007. These models were clearly to be taken into account in the assessment of damages. But the plaintiffs contended that six further models were also infringing and should also be taken into account.

The court disagreed. Indeed, the 2011 appeal judgment held that the first four models were infringing. Whether the six other models are also infringing or not was not decided upon. The 2011 ruling also contained an order not to make, market, and the like, any connecting rods identical or similar to the ones found to be infringing. However, this could not be seen as a basis for including the additional six models in the assessment:

This injunction, which guarantees that the monopoly right is restored to its state before the infringement, concerns the future and makes it possible if necessary to start further legal proceedings against an infringer who is then aware of the infringement. 

I have of course no idea whether the six additional models of connecting rods were similar or identical to the first four ones. But I think it is really a pity that the court did not find a way to rule on the additional infringement claim in this ruling (be it to hold that the new models infringe, do not infringe, or that there is not enough evidence of infringement). Telling the plaintiffs that they can start a new action does not seem satisfactory on the standpoint of efficiency, especially in view of the overall duration of the present proceedings.

The rest of the decision is concerned with the actual computation of damages, plaintiff by plaintiff, defendant by defendant, and period of time by period of time.

For the most part, the expert’s report was approved by the court.

By way of example, the plaintiffs contended that some accessories, such as fixation means, should also be included in the calculation, in view of the well-known doctrine of the “tout commercial” (which could be translated as the doctrine of the commercial package). The court rejected the contention, because there was no evidence that the accessories were sold as a consequence of the sale of the infringing connecting rods.

Paulstra claimed that it has suffered lost profits because they would have been able to make and sell all the connecting rods according to the invention marketed by the defendants. This point was accepted by the expert and the court.

However, the margin to be applied to the lost sales in order to compute loss profits was hotly debated.

Paulstra successively announced three different margins: 3%, 5.6% and finally 9.7%. They said the first two figures were erroneous: the first one concerned another equipment, and the second one concerned all connecting rods in general and not specifically those protected by the patent.

The court was (understandably) irritated by this flip-flopping and was not convinced that the initial figure was erroneous:

[The defendants] rightly stigmatize the behavior of Hutchinson and Paulstra, by emphasizing the contradictions in their successive statements, their inconsistency, and their lack of credibility, stating that this is due to their decision to prevent any control over Paulstra’s claims […]. The error alleged by Paulstra when the first rate of 3% was mentioned is indeed not credible, in view of the time that they took before replying to the expert, and of the importance of its “connecting rods” business. They necessarily knew what it was worth […].

Furthermore, the final figure of 9.7% was only supported by a statement by the company’s accounting director; and by a late-filed communication from an external auditor. The former was criticized by the expert as being a non-certified statement. The latter was disregarded by the court as it was too vague and imprecise, and not explicit enough.

As a result, the court applied a margin rate of 3% to Paulstra’s lost sales, also noting in passing that it is “the rate generally used in this type of product in the automobile industry“.

The moral prejudice suffered by the licensee Paulstra was calculated by the expert to be 125,000 euros. But the judges reduced this amount to zero. They held that there was no evidence that the defendants’ actions had harmed Paulstra’s reputation, as was alleged.

Turning to the patentee, Hutchinson first claimed lost profits due to Paulstra’s lost sales, because the patent was licensed to the subsidiary. Here, again, the court refused to take such lost profits into account:

It cannot be denied that a patent proprietor that does not exploit the invention but grants a license for its exploitation has the right to be awarded the profits it did not make because of the infringement. But it has to show that the alleged lost profits are real. 

In this respect, even if it is demonstrated that Hutchinson and its subsidiary Paulstra were bound by a lease management agreement, Hutchinson does not provide any evidence as to the profits earned owing to the license. […]

[…] [Hutchinson] relied on trade secret as the reason why no information was provided in this respect. But, during the expertise proceedings, they stated: “[…] these damages should no be calculated based on the contractual royalty that Paulstra would pay to Hutchinson. Indeed, Paulstra is only a subsidiary of Hutchinson, and it is not conventional, at least in terms of patentee-licensee relationships, to have such contractual royalty be paid between companies of a same group” […]. 

Since the very existence of the royalty was not demonstrated, the corresponding claim cannot succeed. 

Again, the claimants’ ambiguous statements certainly played against them. Half-admitting that there was no license royalties between Hutchinson and Paulstra while relying on trade secret not to say more was not a successful strategy for convincing the court that there were indeed lost profits to be recovered. Would the outcome have been different if Hutchinson had claimed the lump sum provided for in the last paragraph of article L. 615-7, which cannot be less than the royalties the infringer would have paid? I tend to think so.

Hutchinson was nevertheless awarded 60,000 euros (as estimated by the expert) in terms of moral prejudice. It is indeed generally accepted that patent infringement necessarily causes moral prejudice to the patent proprietor because the invention is depreciated.

On the other hand, Hutchinson lost again when they claimed the profits due to the infringers’ investment savings. They estimated such profits to be equal to 5% of the defendants’ connecting rod turnover. But the court held that the profits made by the defendants had already been taken into account in Paulstra’s damages; and that the claimed percentage, allegedly based on Hutchinson’s own spending, was not credibly substantiated, since it seemed to include other activities than those related to the patented invention.

In summary the total damages award for Hutchinson and Paulstra is 652,003 euros. Was the so far 11-year long litigation worth it? Of course the damages award is only part of the answer, as the claimants did get a permanent injunction which after all is the actual weapon of mass destruction in a patent war.

Anyway, the case strikingly illustrates that damages assessment is an endeavor of its own, sometimes underestimated by litigants. Just like for the assessment of validity and infringement, the court wants to see convincing evidence of whatever is asserted by the parties and will not satisfy itself with unsupported statements, let alone ambiguous ones.


CASE REFERENCE: Cour d’appel de Paris, Pôle 5, chambre 2, February 12, 2016, Hutchinson & Paulstra v. CF Gomma Barre Thomas et al., RG No. 09/13793.

Leave a Reply

Your email address will not be published.