Punitive damages for IP infringement and the Enforcement Directive: some thoughts on the OTK decision

On 25 January last, just a few months after the Liffers (here, and on IPlens) and Hansson (here) judgments, the EU Court of Justice issued another decision under Article 267 TFEU on compensation for IP infringement (OTK, C-367/15, ECLI:EU:C:2017:36: here).

The case concerned the compatibility with Article 13 of Directive 2004/48 (the Enforcement Directive) of a provision of the Polish copyright law whereby, in the case of infringement, the copyright holder may be awarded a sum of money consisting of two or three times the amount of the hypothetical royalty.

Pending the referral proceedings, the above national provision was declared unconstitutional by the Trybunał Konstytucyjny (the Polish Constitutional Court) insofar as it provided for compensation amounting to “three times” the hypothetical royalty. As a consequence, the scope of the EUCJ’s analysis was narrowed to “duplication” of the hypothetical royalty.

However, while triplication of the hypothetical royalty (at least in many cases) quite blatantly amounts to a punishment, duplication thereof may also be viewed as a way of ensuring that IP holders are fully compensated for the damage they have suffered. Therefore, the decision of the Polish Constitutional Court gave the EUCJ the opportunity to answer the preliminary question posed by the referring Court without explicitly ruling on the compatibility of punitive damages with the Enforcement Directive. An opportunity which – at least at first sight – the EUCJ did not miss.

After stating that

Directive 2004/48 lays down a minimum standard concerning the enforcement of intellectual property rights and does not prevent the Member States from laying down measures that are more protective” (paragraph 23)

and that

the fact that Directive 2004/48 does not entail an obligation on the Member States to provide for ‘punitive’ damages cannot be interpreted as a prohibition on introducing such a measure” (paragraph 28)

the Court went on to state that

without there being any need to rule on whether or not the introduction of ‘punitive’ damages would be contrary to Article 13 of Directive 2004/48, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages” (paragraph 29), in view of the circumstance that “mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs — referred to in recital 26 of Directive 2004/48 — that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice … or payment of interest on the sums due” (paragraph 30).

In the light of the above, it would be fair to think that the Court did not believe the issue of punitive damages to be at stake in the case at hand; that, in the Court’s view, the Polish provision in question did not provide for punitive damages; and that, therefore, the Court saw no reasons for (again, explicitly) ruling on the compatibility of such damages with Article 13 of the Enforcement Directive.

However, in paragraph 31, the Court concludes its reasoning by admitting that a doubled “hypothetical royalty” may exceed the loss actually suffered by the IP holder: and, “in exceptional cases, may exceed it “so clearly and substantially that a claim to that effect could constitute an abuse of rights, prohibited by Article 3(2) of Directive 2004/48”.

So, quite interestingly, when it deals with the case of the IP holder being awarded a sum exceeding the actual loss as a result of the application of the Polish provision at stake, the Court does not make any reference to Article 13 and to the expression “damages appropriate to the actual prejudice” contained therein. In line with its conception of the Directive as a “minimum standard” (paragraph 23), the Court only relies, with regard to damages exceeding the actual loss, on the concept of abuse of right provided by Article 3(2). And this seems to be an implicit acknowledgment of the admissibility of punitive damages under Article 13 of the Enforcement Directive. Indeed, on the one hand, damages which exceed (even if not “clearly” and “substantially”) the actual loss suffered by the IP holder are not compensatory, but punitive. On the other hand, an abuse of right entails the existence of a right. Thus, it might be inferred from paragraph 31 of the reasoning that, according to the Court, the Directive does not prevent national laws from providing IP holders with the right to be awarded damages which exceed the actual loss they suffered – that is, punitive damages. However, the right in question, just like any other, should not be abused. And, in this regard, the Court appears to find in the general Member States’ obligation to provide for safeguards against the abuse of rights under Article 3(2) of the Directive the sole limit to punitive damages laid down by the Directive itself. The Court does not precisely indicate when claiming damages which exceed the actual loss constitutes an abuse of right. It simply says that claiming damages which clearly and substantially exceed the actual loss may amount to an abuse, thus leaving unsolved the issue of what “clearly” and “substantially” mean.

The Court decision, in this perspective, appears to be in flagrant contrast with the opinion (here) of Advocate General Sharpston (who pointed out that, under the Enforcement Directive, compensation should be appropriate and proportionate to the actual prejudice suffered by the IP holder).

It may be noticed that a provision almost identical to the Polish one was contained in the Proposal for a Directive on measures and procedures to ensure the enforcement of intellectual property rights presented by the Commission on January 2003 (here). Under Article 17 of the Proposal [which, contrary to Article 13 and recital 26 of the Enforcement Directive, expressly referred to both compensatory and non-compensatory damages]:

“… the competent authorities shall award, at the request of the prejudiced party:

(a)  … damages set at double the royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.

And, in such respect, the Commission’s Executive Memorandum (here) read as follows:

This provision does not constitute punitive damages; rather, it allows for compensation based on an objective criterion while taking account of the expense incurred by the right holder such as administrative expenses incurred in identifying the infringement and researching its origin”.

*** . *** . ***

The issue of punitive damages is a very hot one. In Italy, such damages have traditionally been considered as contrary to the public order (see, for all, Court of Cassation, 19 January 2007, no. 1183). However, quite recently [1], the I Civil Division of the Italian Court of Cassation submitted the issue to the President of the Court of Cassation for the possible consideration of the Joint Divisions of the same Court of Cassation, also in view of the presence in the Italian legal system of provisions which may be read as providing for punitive damages. So far, no decision has been rendered by the Court of Cassation in this respect. However, it is not unlikely that the Court will change its traditional stance.

In this context, it is worth remembering that Article 68(2) of the Agreement on a Unified Patent Court clearly provides that “The infringer shall not benefit from the infringement. However, damages shall not be punitive”. Thus, at least in (unitary) patent matters, the issue might be considered to be resolved.

Riccardo Perotti

[1] Order no. 9978 of 16 May 2016, available here.

EU Court of Justice, 25 January 2017, Stowarzyszenie ‘Oławska Telewizja Kablowa’ v Stowarzyszenie Filmowców PolskichC-367/15, ECLI:EU:C:2017:36.

CJEU delivers its judgement in the Liffers case: there is no bar in the Enforcement Directive on claiming compensation for both moral and material damage

By its 17 March 2016 decision (here), the CJEU cleared the doubts raised by the Spanish Tribunal Supremo as to an IP holder’s right to be compensated, in accordance with Article 13(1) of the Enforcement Directive (Directive 2004/48), for both material damage on the basis of the hypothetical royalty criteria laid down by subparagraph 2, heading (a), of said article, and moral damage under heading (b) of the same subparagraph 2.

The Tribunal Supremo’s doubts arose from the wording of Article 13(1), whose subparagraphs 1 and 2 read as follows (emphasis and numbers added):

“[1] Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement.

[2] When the judicial authorities set the damages:

(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement;

or

(b) as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question”.

Indeed, the expressions “or and “as an alternative to (a)” contained in subparagraph 2 of Article 13(1) may well be read as dividing the criteria for setting damages provided by headings (a) and (b), in such a way that the two cannot be invoked together by IP holders (nor merged by the judicial authorities). The CJEU did not stop at a literal interpretation of Article 13(1), though, but looked at the article “in light of the objectives” pursued, in its view, by the Enforcement Directive.

From this perspective, the Court said that subparagraph 1 of Article 13(1) was aimed at ensuring full compensation for the “actual prejudice suffered” by right-holders, which means compensation for both material and moral prejudice (see paragraph 25 of the ECJ decision).

As the “hypothetical royalty” criterion provided by heading (b) of Article 13(1), subparagraph 2, does not take into account moral prejudice, each time an IP holder suffered moral prejudice in addition to material prejudice, application of this criterion alone would prevent full compensation being awarded. This outcome is inconsistent with the goal and the very rationale of said provision.

On these grounds the Court of Justice, upholding the opinion of Advocate General Whatelet (here), answered the preliminary questions raised by the Tribunal Supremo by stating that Article 13(1) must be interpreted as permitting a party injured by an IP infringement, who claims compensation for his material damage as calculated on the basis of the “hypothetical royalty”, to also claim compensation for the moral prejudice he/she has suffered.

It may be noted that, from a strictly Italian standpoint, the CJEU decision does not really add anything new, as the national provisions into which Article 13(1) of the Enforcement Directive has been transposed do not contain any reference to an alternative between compensation for moral prejudice and for material prejudice. Article 158(3) of Italian Copyright Law expressly states that moral damages can be recovered in addition to material damages calculated on the basis of the “hypothetical royalty” criterion. And, albeit less explicitly, but nevertheless clearly, Article 125 of the Italian IP Code, concerning IP rights other than copyright, does the same.

Riccardo Perotti

CJEU, 17 March 2016, C-99/15, Liffers