Aligning Damages for Patent Infringement with
Competition: A Comparison of Japan, Germany, the USand China (*)
Invited Researcher: HU, Jingjing (**)
This research explores how to determine patent damages that closely replicate the market
value of an invention. This research first discusses how does competition impact patent damages.
The patent system aims to promote innovation, the competition policy also trigger innovation.
Damages that protect the exclusivity under the patent system meanwhile avoid distorting
competition are beneficial to the innovation target to the greatest extent. From the standpoint ofa justice, this research concludes three issues essential to the kind of patent damages and themagnitude of patent damages: the kind of the patented technology (disruptive or non-disruptive),
the existence of the patent product, the existence of competition between the litigants.
Upon clarifying the correlation between competition and patent damages, this research
conducts a comparative examination of the legislation of compensation and relevant precedents
in the US, Germany, Japan and China. The comparison finds that: (1) the US, Germany andJapan emphasize the “but-for” test, accordingly give much weight to the role of the competition
vis-à-vis the issue of determining damages, such consideration is embodied with the alternative
to the patented product or patented technology; (2) Chinese precedents barely demonstrateconsideration of competition. Chinese courts have insisted on unrealistic standards of proof for
the Art.65 para. 1 of the Chinese Patent Law. The application of the three methods featured by
the “all-or-nothing” approach. Therefore, the damages are not in proportion to the competition
degree. This research holds that observation of the category of damages, the lost profits or thelost royalties, is as significant as the issue of the damages magnitude; and both issues
necessitate considerations of competitions. Further, it provides triple suggestions for China.

Under the TRIPs (Trade Related Intellectual Property Rights) Agreement, the member states
must empower their judicial authorities to order the infringer to pay the right holder damages
adequate to compensate for the injury he has suffered because of an infringement of that person’s
intellectual property right by an infringer who knowingly, or with reasonable grounds to know,
analogies to calculate the amount of damages.1 Under Art.13 para.1 lit. b of Directive 2004/48/EC,
in appropriate cases Member States set damages as a lump sum on the basis of elements such as atleast the amount of royalties or fees which would have been due had the infringer requested
authorization to use the IPR at issue.

Originating from these treaties and precedents, most countries established three methods of(*) This is a summary of the report published under the 2016FY Industrial Property Research Promotion Project entrusted by theJapan Patent Office.
(**) PhD of Law, Peking University Law School, at our institute over a period of approximately 7 months from July 19, 2016
through February 18, 2017, as an Invited Researcher for the Fiscal Year 2016.
1 Directive 2004/48/EC, Art. 13.

idetermining damages to patent infringement: the lost profits, the infringer’s profits and reasonableroyalties. The three methods aim to facilitate the calculation process under the “differential method”
in the civil law. The U.S. law originally admitted the method of infringer’s profits, but it was deletedin 1946. Accordingly, in the U.S. patent damages are determined in the form of either lost profits or
reasonable royalties. As an alternative to damages under the three methods, Chinese Patent Law
allows courts at their discretion to determine the quantum of damages on the speciﬁc facts, a remedy
known as “statutory damages”. 2 It exists as a ﬂoor for those who cannot discharge evidentiary
burdens under the three methods. The reason to establish the statutory damages is that it is sometimes
difﬁcult to determine compensation through the three methods.3 Currently, statutory damages areapplied extensively.
In terms of patent damages, before come to the issue of gauging the range of losses, it isnecessary to identify what kind of losses are lost due to unauthorized use of the patented technology.
The losses can be divided into two kinds: lost selling profits of the patented product, lost royalties.
Existence of competition relationship between litigants suggests the happening of lost profits for thepatentee, i.e. but for the infringement the patentee would have gained the sales or profits taken by
the infringer. By contrast, the lost profits would not arise in cases where the competition relationshipis absent. In this case, the patentee is entitled to the reasonable royalties because the reasonableroyalties are interpreted as a floor damages in case that the evidences supporting the lost profits areinsufficient, aiming to ensure that the patentee would be awarded with damages in any case. To better
coordinate the civil law and patent system, it is suggested an understanding from the standpoint of
the concept of damages. That is, but for the infringement the patentee would have gained reasonableroyalties, under which lies a presumption that the patentee would likely to license his or her patentto the infringer because of absence of competition relationship between the litigants. If the difference
between two kinds of losses is ignored, then over/under-compensation is likely to arise. To be specific,
when the losses are selling profits, but damages are awarded in the form of reasonable royalties, thenunder-compensation arises. On the other hand, when the losses are royalties, but lost profits or
infringer’s profits are awarded, then over-compensation arises. For example, in China, the infringer’sprofits can be awarded even if the litigants are not competitors; given that the infringer’s profits arenormally higher than the reasonable royalties, a result of over-compensation is very likely.
Following the issue of identifying the kind of damages comes the issue of gauging the23

Chinese Patent Law, Art. 65 para. 1.
SPC’s Memorandum Of Meeting of Partial Courts on Intellectual Property Trial (最高人民法院关于全 国部分法院知识产权审
判工作座谈会纪要), Part 3.5.

iimagnitude of damages. There are three elements influencing the kind and magnitude of damages: thetype of the patented technology; the patentee’s enforcing way of the patented technology; and thecompetition relationship between the patented product and the infringing product. The magnitude ofthe lost profits is influenced by double elements: (1) the competition relationship between litigants,
or say the mutual-alternative relation between the patented product and the infringing product; (2)the competitions deprived from the non-infringing alternatives to the patented product. Themagnitude of the reasonable royalties refers to the price that the reasonable licensee/licenser would
have agreed on, which fundamentally depends on how competitive does the patented technology incomparison with its alternatives in the technology market.
Conclusively, to determine the kind and magnitude of damages, a justice must consider threeissues:(1) Is the patented technology a disruptive technology? In cases where the patented technology
is the disruptive technology, given that the monopoly power entitled by the technology being partly
grabbed by the infringer because of unauthorized application to the technology, the infringing
products’ selling profits usually can be presumed to be the losses. The damages causality between
infringement acts and the losses of the patentee is clear. However, the situation of non-disruptive
technology is very complicated, the damages causality always appears vague.
(2) In what way does the patentee enforce his or her patent? Damages to patent infringement
meant to protect the patentee to earn the market rewards, which are in the form of either selling profits
or license royalties. Some patentees manufacture product with the patented technology. In this case, hewill try to exclude his competitors rather than license it to his competitors. Such lost profits due toinfringement are mostly in the form of lost sales and price erosion. Then the patent rewards are theselling profits of the patented product, which are dependent on products competition, that is, the extent
to which consumers prefer it over alternatives. While other patentees prefer to license his patent,
normally, to his non-competitors. If a patentee does not manufacture products or provide services withhis or her patented technology, he or she may intend to license it to others. While patent troll would be
an exception, whose patent damages should be discussed individually. In this case, someone’s
unauthorized application of the patented technology lead up to lost royalties to the patentee.
(3) Supposing that the patented product exists, the kind and magnitude of damages aredependent upon the competition relation between the patented product and the infringed product inthe same consumer market. It is rational and usually to presume that the patentee would have gain
more profits had the infringement not happened. Such lost profits due to infringement are mostly inthe form of lost sales and price erosion.

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Upon clarifying the correlation between competition and patent damages, this research
conducts a comparative examination of the legislation of compensation and relevant precedents in
the US, Germany, Japan and China.
The US, Germany and Japan are sharing more similarities than differences. They all recognizethat the special methods are meant to facilitate the issue of determining the amount of damages by
alleviating the patentee’s burden of proving the range of actual losses due to infringement. Therefore,
the courts of these countries tend to hold a relaxed and flexible attitude toward the evidence rules,
which makes it possible to add or reduce the amount of damages considering the competition
situation.
Regarding the lost profits determination, the three countries all emphasize the question of “butfor”: how many sales or profits the patentee would have gained had the infringement not happened?
In Japan, the competition relation between the parties serves another precondition to apply the Art.
102(1). Japanese courts abandoned the approach of “all-or-nothing” after the proviso of the Art.
102(1) was established. Accordingly, the amount of lost profits can be in proportion to thecompetition degree between litigants and the existence of alternatives to the patented product.
The US court developed many ways to identify the scale of lost profits. To answer the but-fortest, the US court particularly highlights the issue of alternatives to the patented product or thepatented technology, which are embodied with the factor of consumer preference. The US court havelong admitted that an accurate measure of the profit the patentee lost or the infringer gained due tothe infringement cannot be determined without considering the possibility for the infringer to use thenext-best available non-infringing alternative. If the infringer could have diverted to a non-infringing
alternative which consumers would have been found indistinguishable from the patented invention,
the patentee’s position would have been precisely the same absent the infringement, compensation
for lost profits would be denied as the “but-for” test would not be satisfied.4 To be specific, thePanduit rule necessitates a condition of “lacking non-infringing alternatives”; the “market share” rulelead up to damages corresponding to the patentee’s market share; the EMVR (Entire Market ValueRule) presumes the entire sales of the infringing product to the sales would have been made by thepatentee but-for infringement if the patented technology composes the main purchase reason.

4Thomas F. Cotter, Patent Damages Heuristics (July 13, 2016). Texas Intellectual Property Law Journal, Forthcoming; Minnesota
Legal Studies Research Paper, p.28.

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In Germany, apart from lost sales and price erosion, the lost profits can also compensate remoteharms including those resulting from “market confusion” (Marketverwirrung) are also compensable.5
German courts do not presume that every sale deprived the patentee of a corresponding sale; rather
the patentee must present evidences proving but for infringement how much sales he or she would
have gained. Accordingly, in cases where the non-infringing alternatives exist, the causality chain
between infringement act and lost profits may be doubtful. Under such circumstance, German courts
may prefer to determine lost profits in accordance with the patented product’ market shares.6 Only
when the infringing product was the “only product used for specific purpose” shall the causality berecognized.7 Whereas there exists a division on whether the opposite side of the “but-for” test must
be considered: the sales of the patented products would decrease in any case, even if the infringement
had not happened. German courts try to relax the proving standard, rejecting the “all-or-nothing”
approach. Therefore, the infringer would not be exempted from making compensation just becauseof the “but-for” test’s opposite side is satisfied. 8 It correspondent to a traditional approach inGermany---“Rechtmäßige Alternativverhalten”, which specifies that it is forbidden to exempt
infringement responsibilities simply because that the same suffering would still arise even if theinfringement had not happened.9 What’s unclear is whether German courts consider the infringer’s
ability to compete by marketing a non-infringing alternative. Justice Meier-Beck has mentioned thepossibility that such alternative would affect the calculation of lost profits.10All in all, the US, Germany and Japan emphasize the “but-for” test, accordingly give muchweight to the role of the competition vis-à-vis the issue of determining damages, such consideration
is embodied with the alternative to the patented product or patented technology.
By contrast, Chinese precedents barely demonstrate consideration of competition. Chinese
courts have insisted on unrealistic standards of proof for the Art. 65 para. 1 of the Chinese PatentLaw. The application of the three methods featured by the “all-or-nothing” approach. The applicationof the statutory damages is too rough to provide convincing reasoning. Therefore, the damages are
not in proportion to the competition degree. Observation on the relevant precedents in China suggeststhat the role of competition fall to receive sufficient consideration in terms of determining damages.

5Markus Schönknecht, Determination of Patent Damages in Germany, IIC (2012) at 309.
Peter Meier-Beck, Damages for Patent Infringement According to German Law—Basic Principles, Assessment and Enforcement,
IIC (2004) at 116.
7 Horst von der Osten, Schadensersatzberechnung im Patentrecht, 2000 MITTEILUNGEN DER DEUTSCHENPATENTANWALTEN 95(95-96).
8 Oberlandgeticht [OLG] Hamburg Apr. 26, 2007, 3 Zivilsenat. Cited in Thomas F. Cotter, Comparative Patent Remedies—A Legaland Economic Analysis, Oxford University Press, p. 264.
9 Wolfgang Krüger ed., Münchener Kommentar zum Bürgerlichen Gesetzbuch(2007) Sec. 249 Rn. 213.
10 Peter Meier-Beck, Damages for Patent Infringement According to German Law—Basic Principles, Assessment and Enforcement,
IIC (2004) at 116.
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Against such background, this research makes three proposals for Chinese patent law and its
practice:(1) Proving standard should be relaxed, which accordingly creates discretion space in the threemethods as well as mitigates the burdens of proof for patentees. Concerning the calculation methodsof patentees’ losses and infringers’ proﬁts, the approach taken by the German courts provide a
desirable reference. That is, if only the patentee provides rough evidences proving the general extent
of damage, causality of lost profits chain between the infringement act and losses of the patentee isdeemed justified, accordingly damages in the form of lost profits or infringer’s profits must beawarded. In terms of the reasonable royalties, courts should be allowed to adopt a general calculation
standard in a relevant market at its discretion. In so doing burdens of proof on the patentees are
mitigated, then the exact amount of damages can be determined.
(2) To specify all the calculation methods in the aspects of the legal nature, the preconditions
and the burdens of proof. The Art.65 of the Chinese Patent Law and its judicial interpretations provide
nothing but calculation formulas, plus the fact of “all-or-nothing” approach in practice, the special
methods are more of stereotypes rather than living regimes representing the “but-for” test in variedprofiles. On this point, Art. 102 (1), (2), (3) of the Japanese Patent Law and relevant practices provide
valuable references. The precondition for the three special methods deprived from their legal nature-- “presumption". Hereinafter the burden of proving the range of actual losses is eliminated for thepatentee. At the same time, given that the actual losses are not always corresponding to thepresumption, the infringer is entitled to overturn the presumption by providing opposite evidences.
(3) The rule of sequential application should be cancelled. Instead, the patentee should beentitled with the right to select the calculation method. Putting the discussion of civil procedural
theory aside, the main reason lies in the fact that the sequential application blocks the way to use
different methods in accordance with different kind of losses as I proposed before.

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