Germany: On The Amount Of The Infringer's Profits Under Commercial Intellectual Property Law Taking Account Of The "Causality Proportion"

Last Updated: 20 May 2013
Article by Jürgen Schneider

The recently-published "Flaschenträger" decision by the Tenth Senate of the Fede­ral Court of Justice (BGH) (GRUR 2012, 1226), which deals with cases under the patent and utility model laws, looks at the amount of infringer's profit to be han­ded over. The BGH also commented on the "causality proportion", in other words, on the difficult question of the extent to which the profit made by the infringer can be traced back to the infringement of the intellectual property right. The Tenth Senate's statements may have significance for all areas of intellectual property law.

Following the "Gemeinkosten­anteil" (GRUR 2001, 329) and "Steckverbindergehäuse" (GRUR 2007, 431) decisions of the First Senate of the BGH, the holders of intellectual property rights increa­singly started to claim compensa­tion in the form of recovery of the infringer's profit. The reason for this development lies in the fact that, according to the strict requi­rements of the BGH in these decis­ions, the infringer may only deduct very minimal costs (overheads) from the turnover achieved using the infringing objects, with the consequence that the profit to be handed over is comparably high; in any case, higher than the com­pensation to be paid in accordance with the licence analogy.

Profit is turnover minus costs; the fewer the costs that can be deducted, the higher the profit to be handed over. In the "Gemein­kostenanteil" and "Steckverbin­dergehäuse" decisions, the BGH stated that when determining the infringer's profit, only those costs that could be directly attributed to the infringing object, and that would have notionally been incur­red in the course of production by the holder of the intellectual pro­perty rights, could be deducted. Overheads cannot be deducted, as they would have occurred anyway in the course of the infringer's ope­rations ("in-any-case costs").

The requirements for deductibili­ty of costs from turnover are thus very strict and the details are dif­ficult. Unit labour costs in connec­tion with the manufacture of the infringing objects are deductible as they can be directly allocated to the product. Expenses in res­pect of employees outside pro­duction, i.e. in sales, marketing and administration – an aspect of staff costs that is regularly coun­ted – may only be deducted by the infringer if these persons were employed exclusively for the ma­nufacture and/or sale of the inf­ringing objects. If the employees also undertake other tasks, none of the costs are deductible (cf. in particular the Düsseldorf Higher Regional Court, InstGE 13, 199 – Schräg-Raffstore). In such a case, the staff costs are not deductible proportionally, either, as the BGH rejects a percentage allocation of costs incurred both in respect of objects of infringements and for other purposes.

The same approach applies in the case of all other costs, e.g. for ren­tals or depreciation in respect of machinery, production and storage buildings. Rentals or depreciation of fixed assets are only deductib­le if they are used exclusively for the infringing objects. If the buil­dings or machinery are also used for other products, none of these costs are deductible.

Account should furthermore be ta­ken of the fact that the full burden of allegation and of proof in res­pect of the deductibility of specific costs lies with the infringer. If the infringer is unable to provide proof, the costs are not deductible.

In view of the strict requirements in respect of the deductibility of costs, the case law in the "Ge­meinkostenanteil" and "Steckver­bindergehäuse" decisions has led to the courts considering a com­paratively high proportion of the turnover as infringer's profits to be handed over, as shown by the following examples of lower-court case law:

  • Düsseldorf Regional Court In­stGE 1, 276 – Klemmring: pro­fit to be handed over = 46%,
  • Munich Regional Court I Inst­GE 3, 48 – Rasenwabe: profit to be handed over = 23.33%,
  • Düsseldorf Higher Regional Court InstGE 5, 251 – Lifter: profit to be handed over = 20%
  • Frankfurt am Main Regional Court InstGE 6, 141 – Bors­tenverrundung: profit to be handed over = 33%,
  • Mannheim Regional Court In­stGE 6, 260 – Abschirmdich­tung: profit to be handed over = 25%,
  • Düsseldorf Higher Regional Court InstGE 7, 194 – Schwer­lastregal II: profit to be handed over = 60%,
  • Düsseldorf Regional Court In­stGE 8, 257 – Tintentankpat­rone: profit to be handed over = 15%,

The amounts of compensation to be paid by the infringer according to these decisions substantially ex­ceed the (commercial) profits ac­tually made by the infringer. Such adjudications may in individual cases put the continued existence of the infringer at substantial risk. This could be found to be "inequi­table", in particular in the case of infringers who have only been slightly negligent.

For this reason, in recent years there has been a reconsideration of the amount of infringer's profits to be handed over. The spotlight is once again on the fact that, ac­cording to the law of damages, there must be a causal connection between the breach of duty and the damages. The infringer should only have to hand over the profit arising from the infringement of the intellectual property rights, as has been made clear by the BGH in the "Flaschenträger" decision. This has the ring of a truism to lawyer. However, in individual cases it can be very difficult to ascertain the ex­tent to which the profit made by the infringer from the infringing objects can be traced back, for example, to a patent infringement.

For example, if a patented inven­tion relates to a technical device within the engine of a car, of which the customer is totally unaware, the decision of the customer to buy the car has nothing to do with the patented invention. The decision to buy the car was much more influ­enced by factors such as the name of the manufacturer, the brand, the design and the price than the pa­tented invention. In such a case, the profit made by the infringer on the sale of such cars could not be causally linked to the infringement of the intellectual property right at all.

Nevertheless, the infringer is ob­liged even in such a case to pay compensation to the holder of the intellectual property right, as it is unanimously held that the dama­ges in the case of infringement of intellectual property rights is deemed to lie in the adverse effect on the right itself (patent, brand, industrial design, copyright, etc.) and the infringer is putting himself in the place of the rights holder, claiming the latter's due benefits of use for himself. The intellectu­al property rights holder should be granted compensation for this alone.

On one hand, the compensation due to the intellectual property rights holder must be taken ac­count of, but on the other hand it cannot be ignored that the decisi­on of a customer to buy an object of an infringement is often based on other factors. In recent years these considerations have led to only a part of the infringer's profits being handed over, determined in accordance with the causality pro­portion.

For example, in its "Schräg-Raffs­tore" decision (InstGE 13, 199), the Düsseldorf Higher Regional Court adopted a causality propor­tion of 40%; consequently, the inf­ringer had to hand over 40% of the infringer's profits to the intellectual property rights holder. In the "Fla­schenträger" decision the BGH confirmed the view of the court of appeal (Frankfurt am Main Higher Regional Court) that a causality proportion of 50% was reasonab­le, with the result that the infringer had to pay 50% of the infringer's profits in compensation.

The infringer's profits to be handed over are determined using the fol­lowing method:

The starting point is the turnover notified by the infringer as having been achieved from the infringing objects. The difficulties begin here if, as is so often the case, the pa­tented invention only forms part of an overall device, as in the afore­mentioned example of a technical detail in the engine of a car. If the part is not available on the market separately from the overall device, the basis must be the turnover achieved from the overall device. In the aforementioned example, the overall device may be the car, or it may be the engine if this is an independent traded unit with its own price.

The turnover is subject to deduc­tion of costs in accordance with the principles of the "Gemeinkostenan­teil" and "Steckverbindergehäuse" decisions, i.e. only those costs that can be directly attributed to the in­fringing objects. The causality pro­portion must also be ascertained for the resultant infringer's profits, that is the part of the infringer's profits to be paid as compensation.

The burden of allegation and of proof in respect of the causality proportion lies with the claimant, the intellectual property rights hol­der. All the circumstances of the individual case must be taken into account, including in particular the factors that could influence the customer's decision to buy, such as the name of the manufacturer of the infringing objects, the brand under which the infringing objects are sold, the aesthetic design of the infringing object and the price.

In the case of technical intellectual property rights, account may also be taken of whether other intel­lectual property rights were also involved in the infringing object. If this is the case, the customer's decision to buy would probably be based not only on the patent-in-suit, but also on the other intellec­tual property rights, with the result that the "causality proportion" of the infringer's profits to be handed over turns out lower.

In the case of technical intellectu­al property rights, account should also be taken of whether the inven­tion is merely an "improvement of a detail" or involves a "revolutio­nary intellectual property right". In the case of inventions that merely represent an "improvement of a detail", the causality proportion is correspondingly lower. In the case of "revolutionary" intellectual property rights – such as the air bag, the navigation system or the hybrid motor – the causality pro­portion is correspondingly higher; it may in such cases be 100% of the infringer's profits if the customer's decision to buy is based solely on the fact that the car has an air bag, a navigation system or a hybrid motor.

In the "Flaschenträger" decision, the BGH specified a further fac­tor for determining the infringer's profits to be handed over, namely the deciding consideration of what compensation would be paid in accordance with the licence ana­logy. The author understands this statement by the BGH to mean that the infringer's profits to be handed over should be appropri­ately proportionate to the amount that would be paid on the basis of the licence analogy. The 3 types of calculation for the compensati­on (infringer's profits, licence ana­logy, injured party's actual losses) are known to be "only" variations of damages to be determined on a standardised basis (BGH GRUR 2008, 93 – Zerkleinerungsvorrich­tung).

In this context, reference should also be made to an article by the Presiding Judge of the Tenth Se­nate, Prof. Dr. Meier-Beck, in WRP 2012, p. 503 et seq., whereby, in the case of compensation for da­mages for the infringement of in­tellectual property rights, "it does not appear to be far from the mark for a doubling of the licence fee, based on the usual contractually-agreed licence fee, to be justified".

Finally, interest should not be for­gotten. The calculation method for the infringer's profits is based according to customary law on the principles of an assumed ma­nagement board without brief. By applying Section 668 of the Ger­man Civil Code accordingly, the injured party therefore has a claim for interest on money spent from the moment the damages arose. The damages arise with the first use by the infringer (the following case is very instructive on patent law: Düsseldorf Higher Regional Court InstGE 7, 194 (Ls. 4), point. 23 – Schwerlastregal II).

In the "Connector Housing" deci­sion the BGH confirmed the legi­timacy of a claim of this kind for interest on the infringer's profits. The interest claimed in that case, of 5% from the moment the dama­ges arose, was awarded by the Court of Appeal, which in the view of the BGH did not represent an error of law (BGH GRUR 2007, 431, points. 14 and 44 – Steckver­bindergehäuse).

The amount of the interest is based on the legal regulations, Section 246 of the German Civil Code and Section 352 of the Commer­cial Code (Palandt/Sprau, German Civil Code, 72nd edition, Section 668, margin note 1). According to Sections 343 and 344 of the Com­mercial Code, an infringement case in intellectual property law usually constitutes a commercial transaction for the parties, so that interest at 5% should be applied to the profits as provided by Section 352 of the Commercial Code. The decision on the infringer's profits is generally made several years after the damages arose, and the claim for damages is therefore usually substantially increased by the in­terest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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