In this second post on damages assessment in the Vorwerk v. Taurus case, I will focus on the computation of the royalty rate used for the assessment of damages (the first part of the story is here).
According to established case law, the rate used for assessing damages needs to be based on a reasonable royalty rate that the parties would have agreed on, had they negotiated a license agreement, but then a multiplying factor needs to be applied to the basic royalty rate. This is often termed an indemnifying royalty.
Some believe that, according to a fundamental principle of civil law, damages cannot have a punitive nature as they are meant to repair a harm suffered by a victim (“all the harm, but not more than the harm”). Thus, an indemnifying royalty simply reflects the fact that a defendant found guilty of infringement would not be in a normal bargaining position and would be put at a disadvantage at the negotiation table.
Others are of the opinion that an indemnifying royalty is necessarily punitive in nature. This line of thought in fact seems to be consistent with what the court itself suggests in the Vorwerk damages decision:
[…] One should take into account the detrimental situation that the patent proprietor is in, since they have to put up with an exploitation of the invention that they have not decided. It would thus be unfair to simply apply a royalty rate equivalent to the one that they would have agreed on if they had negotiated a license agreement.
In the case at hand, the court was confronted with three different calculations of a royalty rate.
The first calculation was the expert’s: the defendants’ operating margin before taxes is 9.6%. A normal royalty rate should thus be 25% of this figure, so approximately 2.5%. However, this rate should further be cut in half and then rounded up to 1.5%, taking into account the fact that the importance of the patent was not paramount for marketing the food processors at stake. Then, three possible multiplying factors were offered by the expert to the court, namely 1 (which is not much of a multiplying factor), 2 or 3.
The second calculation was the plaintiff’s: the main difference between this calculation and the expert’s is that the plaintiff requested that the rate be calculated based on the defendants’ contribution margin, which was assessed to be significantly higher than the operating margin before taxes, at 22%. According to the plaintiff, some fixed costs were erroneously deduced by the expert from the margin, since the defendants would have supported these fixed costs anyway.
Then, the plaintiff suggested a royalty rate of 25 to 33% of the above margin, to which a true multiplying factor should be applied. The plaintiff disagreed with the expert’s finding regarding the lesser importance of the patent for the food processors at stake. But on the other hand, they agreed that those food processors in which the infringing steam-cooking cover was only optional (namely the Mycook Pro series) should be subjected to a lower overall rate than food processors in which the infringing steam-cooking cover was mandatory (the Mycook series).
Last (and least, in terms of figures), the defendants’ calculation was based on the proposition that the royalty rate should not be based on the overall turnover of the complete food processors, but rather on the turnover attributable to the steam-cooking cover. The price of the cover represents approximately 8% of the overall price. As far as the royalty rate itself is concerned, Taurus sided with the expert’s proposition of 2.5% to be cut in half – so, 1.25% without any rounding up. Taurus objected to any multiplying factor, by relying on the principle recalled above that there cannot be punitive damages under French law, and by adding that Vorwerk did not suffer from any negative consequence in the absence of evidence of any direct or indirect exploitation of the patent.
So, in summary, the three royalty rates offered to the court were:
- 13% for the Mycook processors and 6.5% for the Mycook Pro processors (patentee);
- 1.5, 3 or 4.5% for all processors, depending on the indemnifying multiplying factor (expert); and
- 0.1% for all processors, if my math is correct: 1.25 % times 8 % (defendant).
The court selected the middle option, namely the expert’s. And among the three possibilities offered by the expert, they chose again the middle one, namely the 3% rate.
In particular, the court agreed with the selection of the operating margin, and with the proposition that 25% of this margin should represent a valid starting point for the royalty rate. Said the court, this coefficient of 25%
represents an allocation key which is commonly accepted in terms of patent licensing.
It is indeed common thinking in patent licensing that approximately one fourth to one third of the profit made by the licensee owing to the invention should be paid back to the licensor, while the licensee should keep the rest of the profit. It is rather comforting that the court adopted this real-world pragmatic approach.
The court also agreed with the reduction of the rate suggested by the expert:
[…] In the marketing of the food processors at stake, the part taken by the exploitation of the patent itself needs to be put into perspective and reduced since other intangible assets may have contributed to the sales of these products.
Again, this looks like a sound approach. Traditional French case law on computation of damages was mainly established in situations wherein one invention equals one patent equals one product. But this probably no longer correctly reflects the current state of affairs, IP-wise. Even though food processors are not smartphones which incorporate technologies protected by thousands of patents, it seems plausible that they may incorporate a number of patented inventions – not to mention other sources of value.
Finally, the court applied a multiplying punitive-like factor of 2, apparently trying to strike a balance between a low factor which would be unfair to the patentee who did not agree to the exploitation of their patent, and a high factor which would also be unfair since the patentee did not clearly explain how the patent is directly or indirectly exploited by them and thus how there could be additional economic harm.
As mentioned in the first post on this topic, an additional amount of 6,255 euros was also awarded in terms of financial harm. This additional amount was calculated by the expert (with the approval of the court) based on the long-term interest rate in Germany, and was meant to compensate for the accrued interest that the claimant should have earned based on the collected royalties.
It would be interesting to see whether readers believe that other national courts in other European countries would have likely come up with the same kind of figure or whether there are any marked differences of approaches.
CASE REFERENCE: Tribunal de grande instance de Paris, 3ème chambre, 2ème section, September 26, 2014, Vorwerk & Co. Interholding GmbH v. Electrodomesticos Taurus SL, Lacor Export, Lacor Menaje Profesional SL & Taurus France. RG No. 2008/10729.