Calculating Damages for Copyright Infringement in Japan: Understanding Article 114 Provisions

When copyright infringement occurs, one of the primary remedies sought by rights holders is monetary compensation for the harm suffered. While Japan's Civil Code Article 709 provides the general basis for tortious damages (requiring proof of intent or negligence, harm, and causation), the intangible nature of copyright and the diverse ways it can be infringed often make proving the precise quantum of damages exceptionally challenging. To address these difficulties, the Japanese Copyright Act (著作権法 - Chosakken-hō) incorporates specific provisions in Article 114 designed to assist copyright holders in establishing the amount of their losses.

The Rationale Behind Article 114: Alleviating the Burden of Proof

Unlike the theft of tangible property, where the owner is physically deprived of the item, copyright infringement—such as unauthorized reproduction or distribution—doesn't typically prevent the copyright holder from continuing to exploit their own work. The harm is primarily economic, manifesting as lost sales, diluted market value, or usurped opportunities for licensing or direct exploitation.

Establishing a direct and quantifiable causal link between an infringer's specific actions and the copyright holder's exact financial downturn can be a formidable evidentiary hurdle. For instance, if an infringing derivative work enters the market, it can be difficult to prove precisely how many sales of the original work were lost specifically because of that infringing derivative, as opposed to other market factors such as evolving consumer preferences, the presence of legitimate competing works, or even the infringer's own (non-infringing) marketing efforts or product features.

Recognizing these challenges, Article 114 of the Copyright Act introduces several presumptions and alternative methods for calculating damages. These provisions aim to alleviate the copyright holder's burden of proof by allowing damages to be calculated based on figures that may be more readily ascertainable, such as the infringer's profits or sales volume, or a reasonable royalty rate.

Conceptual Underpinnings: Lost Profits vs. Usurped Market Opportunity

Before diving into the specific clauses of Article 114, it's worth noting an underlying conceptual discussion in Japanese copyright law regarding the nature of "damage" itself.

• Traditional View: Compensation for Lost Profits (isshitsu rieki - 逸失利益): One perspective holds that Article 114 primarily serves as a procedural aid to calculate the copyright holder's actual "lost profits"—that is, the profits they would have earned had the infringement not occurred. This aligns with the compensatory principle of general tort law under Civil Code Article 709. The goal is to restore the copyright holder to the financial position they would have occupied absent the infringement.
• Emerging View: Harm to Market Opportunity (shijō kikai - 市場機会): A growing viewpoint, which has found some resonance in judicial decisions, suggests that copyright infringement can cause a broader harm than just directly provable lost sales. This perspective considers the damage to be the infringer's wrongful appropriation or undermining of the copyright holder's "market opportunity." This view sometimes incorporates a deterrent aspect, recognizing that if infringers only ever have to pay for directly proven lost sales (which are hard to prove), infringement might become a calculated risk or a mere "cost of doing business," particularly if the likelihood of detection is low. Thus, there's an argument that the infringer should disgorge gains attributable to the infringement itself, reflecting the value of the usurped opportunity.

This subtle conceptual tension can influence how courts interpret and apply the specific damage calculation methods within Article 114.

Methods for Calculating Damages Under Article 114

Article 114 offers several distinct approaches for a copyright holder to quantify their damages:

A. Infringer's Profits Presumed as Copyright Holder's Damages (Article 114, Paragraph 2)

This provision states that "where an infringer has gained profits through an act of infringement, the amount of such profits shall be presumed to be the amount of damages suffered by the copyright holder."

• Rationale: This shifts the focus from the often-difficult task of proving the copyright holder's own lost sales to the potentially more ascertainable profits made by the infringer from their infringing activities. It also carries an inherent element of disgorgement of illicit gains.
• Rebuttal by the Infringer: The infringer can rebut this presumption. If they can prove that the copyright holder would not have earned all or part of those profits even if the infringement had not occurred, the presumed damages can be reduced accordingly. For example, the infringer might demonstrate that the copyright holder had limited production or distribution capacity, operated in different market segments, or that the infringer's profits were largely due to their own independent efforts, brand reputation, or other non-infringing features of their product.
• Calculation of "Profit" (rieki - 利益): The "profit" referred to is generally interpreted as the infringer's marginal profit – that is, the total revenue derived from the infringing acts minus the variable costs directly attributable to producing and selling the infringing items. Fixed overhead costs of the infringer are typically not deducted from this calculation, especially if it can be argued that the copyright holder, had they made those sales, would only have incurred additional variable costs, having already covered their own fixed costs. This approach was seen in cases like the Tokyo District Court judgment of October 30, 1995 (System Science I case), which concerned program infringement.
• Apportionment and Contribution Rate (寄与率 - kiyoritsu): If the copyrighted work is only one component of the infringing product, or if other intellectual property, the infringer's brand value, or their specific marketing efforts significantly contributed to the overall profits of the infringing product, courts may apportion the infringer's total profits. Only the portion of the profits reasonably attributable to the use of the copyrighted work will be presumed as the copyright holder's damages. The initial burden is on the copyright holder to show the infringer's total profit from the infringing product; the burden then often shifts to the infringer to demonstrate the extent to which those profits were attributable to factors other than the copyrighted work.
• Applicability if the Copyright Holder Does Not Directly Exploit the Work: There has been judicial debate on whether the copyright holder must be actively exploiting the work themselves (e.g., selling competing products) to invoke this presumption. While some older cases suggested this was necessary, more recent trends, partly influenced by patent law jurisprudence (e.g., the Intellectual Property High Court decision of February 1, 2013, in the Kami omutsu shori yōki kōsoshin (Disposable diaper container appeal) patent case), indicate that direct exploitation by the copyright holder might not be a strict prerequisite. If the copyright holder can demonstrate a "causal link" showing they could have otherwise profited from the market opportunity usurped by the infringer (perhaps through licensing), Article 114(2) might still apply. This ties back to the broader "market opportunity" view of damages.

B. Amount Equivalent to a Reasonable Royalty (Article 114, Paragraph 3)

This clause allows the copyright holder to claim, as damages, an "amount equivalent to the amount of money that the copyright holder... would have been entitled to receive for the exercise of his/her copyright." This is essentially a reasonable royalty or license fee.

• Rationale: This provides a practical baseline for damages, particularly useful when proving actual lost sales or the infringer's precise profits is difficult or impossible. It represents the fair market value for the use of the copyrighted work.
• Determining the "Amount Receivable": Importantly, this amount is not strictly limited to any pre-existing license fees the copyright holder might have charged, or to standard industry rates. A 1998 amendment to the Copyright Act removed the word "ordinarily" (通常 - tsūjō) from this provision. This change suggests that courts are empowered to determine a hypothetical reasonable royalty based on the specific circumstances of the infringement. This assessment can take into account factors such as the nature and extent of the infringing use, the profits made by the infringer through that use, and what a willing licensor and willing licensee would have agreed to in a voluntary transaction. This can sometimes result in a court-determined royalty that is higher than what might have been negotiated in a standard, non-infringement licensing scenario.
• Function as a Damages Floor: Article 114, Paragraph 4 explicitly states that if the copyright holder can prove damages exceeding the amount calculated under Paragraph 3 (the reasonable royalty), they are entitled to claim that greater amount. This effectively positions the reasonable royalty under Paragraph 3 as a minimum level of compensation.

C. Copyright Holder's Lost Profits Based on Infringer's Sales Volume (Article 114, Paragraph 1)

Introduced in the 1998 amendments, this provision offers another method for calculating the copyright holder's lost profits, directly linked to the scale of the infringer's activities. Damages can be calculated by the following formula:

(Number of articles transferred by the infringer OR number of reproductions made by the infringer via public transmission) x (Profit per unit that the copyright holder would have made on their own sales of equivalent articles)

However, this amount is subject to two important limitations:

1. Copyright Holder's Selling Capacity: The damages calculated under this formula cannot exceed the amount corresponding to the number of articles the copyright holder could have realistically produced and sold (or otherwise exploited) themselves.
2. Deduction for "Circumstances Preventing Sale" (ただし書 - tadashigaki): The infringer can reduce the damages calculated under this formula by proving the extent to which the copyright holder would not have been able to make those sales due to circumstances other than the infringement. Such circumstances might include:
   • The infringer's own superior marketing, brand recognition, unique non-infringing features of their product, or significantly lower pricing (if not solely due to the infringement).
   • The presence of legitimate, non-infringing competing products in the market that would have captured some of those sales anyway.
   • The copyright holder's established limited market share or restricted distribution capabilities.

This provision is particularly useful when there is a clear overlap between the copyright holder's product and the infringing product, and where the infringer's sales volume is ascertainable. It provides a more direct link to potential lost sales than the infringer's profit presumption, while still allowing for a nuanced, proportional assessment based on market realities. This method applies specifically to infringements involving the "transfer of articles" (e.g., sale of infringing books or CDs) or "reproduction by public transmission" (e.g., illegal downloads impacting digital sales), and not necessarily to other forms of infringement like unauthorized public performances.

Post-Infringement Actions by the Infringer

An interesting question arises if an infringer, after being notified of their infringement, ceases the infringing activity and subsequently purchases legitimate copies of the work or obtains a proper license. Does this rectify the past harm and negate the claim for damages? The Tokyo District Court, in a decision on May 16, 2001 (the LEC case), held that damages are generally assessed as of the time of the infringing acts. A subsequent purchase of legitimate goods does not erase the damages already incurred from the prior unlawful exploitation (such as the loss of a sale that would have occurred at the time of infringement, or the unpaid "license fee" for the period of unauthorized use). To hold otherwise could inadvertently encourage infringement, as infringers might simply opt to pay the standard price only if caught, having enjoyed a period of unauthorized use.

The Role of Negligence (過失 - kashitsu)

For damages to be awarded under the general tort principles of Civil Code Article 709 (which forms the underlying basis for Article 114 claims), the copyright holder must typically establish the infringer's intent (koi) or negligence (kashitsu). Unlike Japanese patent law (Article 103), which presumes an infringer's negligence, the Copyright Act does not contain such a statutory presumption.

However, in practice, negligence is often inferred if the infringer's conduct involved relying on or copying another's copyrighted work, as a reasonable person is expected to exercise due care to ascertain the copyright status of materials they use. Publishers, for example, are generally held to a duty to investigate the rights pertaining to manuscripts they intend to publish, and failure to do so adequately can lead to a finding of negligence (e.g., Tokyo District Court, June 21, 1978 - Nisshōken (Right to Sunshine) case). The extent of this duty is fact-dependent; in some cases, where it was genuinely difficult for a publisher to discover an obscure source used by an author, negligence was not found (e.g., Tokyo District Court, May 31, 1995 - Gūtara Kenkōhō (Lazy Health Method) case).

Even entities not directly committing the infringing acts but significantly facilitating them have been found liable for negligence under principles of aiding and abetting. For instance, a company leasing karaoke equipment to establishments was found to have a duty to ensure that its lessees obtained the necessary music licenses, and failure to confirm this constituted negligence (Supreme Court, March 2, 2001 - Bideo Meitsu (Video Mates) case).

Unjust Enrichment Claims

As an alternative or supplementary cause of action, a copyright holder may pursue a claim for unjust enrichment (futō ritoku henkan seikyū) under Articles 703 and 704 of the Civil Code. This requires proving that the infringer obtained a benefit at the copyright holder's expense without legal cause. While this claim does not require proof of negligence, establishing the direct causal link between the infringer's benefit and the copyright holder's loss can still be challenging. Its primary advantage often lies in its longer statute of limitations (generally 10 years) compared to tort claims (3 years from knowledge of harm and the identity of the perpetrator). The "benefit" for unjust enrichment purposes can include, at a minimum, the license fee the infringer avoided paying.

Comparison with U.S. Copyright Damages

The Japanese approach to copyright damages under Article 114 has both similarities and differences when compared to U.S. law (17 U.S.C. § 504):

• Actual Damages and Infringer's Profits: U.S. law allows the copyright owner to recover their actual damages plus any of the infringer's profits attributable to the infringement that are not already accounted for in the actual damages. The plaintiff proves the infringer's gross revenue, and the infringer then has the burden to prove deductible expenses and the portion of profits attributable to factors other than the copyrighted work. This combined approach has parallels to elements within Japan's Article 114(1) (based on infringer's sales) and Article 114(2) (presumption of infringer's profits).
• Statutory Damages: A major distinguishing feature of U.S. law is the option for the copyright holder to elect statutory damages in lieu of actual damages and profits. These are awarded by the court within a prescribed statutory range per work infringed (currently $750 to $30,000, which can be increased up to $150,000 for willful infringement or reduced for innocent infringement). This is a powerful tool, especially when proving actual damages or infringer's profits is difficult. Japan does not have a general system of statutory damages for copyright infringement, although Article 114(3)'s reasonable royalty provision can function as a type of minimum recovery.
• Reasonable Royalty: In both jurisdictions, a reasonable royalty can serve as a measure of damages. In the U.S., it's often considered a component of actual damages, representing what a willing buyer would have paid to a willing seller for a license.
• Presumptions: Japan's Article 114 codifies specific presumptions (e.g., infringer's profits equate to copyright holder's damages under Paragraph 2, subject to rebuttal). The U.S. system relies more on general evidentiary rules for proving damages, though burdens of proof regarding profits and deductions are allocated by statute.

Conclusion

Article 114 of the Japanese Copyright Act provides a crucial framework for determining monetary damages in infringement cases, aiming to ease the evidentiary burdens on copyright holders. By offering methods based on the infringer's sales volume, the infringer's profits, or a reasonable royalty, the law seeks to ensure fair compensation while acknowledging the practical difficulties of quantifying harm in the context of intangible property. The ongoing judicial and academic discourse regarding the underlying nature of "damage"—whether strictly compensatory for lost profits or also encompassing harm to market opportunity—continues to shape the application of these important provisions.