Calculating Damages for Patent Infringement in Japan: A Deep Dive into Article 102

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

When a patent is infringed in Japan, the patentee is entitled to seek monetary damages to compensate for the harm suffered. While the general principles of tort law under the Japanese Civil Code (Article 709) provide a basis for such claims, patent infringement presents unique challenges in quantifying loss. Recognizing these complexities, Article 102 of the Japanese Patent Act establishes specific frameworks designed to alleviate the patentee's burden of proving the amount of damages. These provisions offer several distinct, though sometimes overlapping, methods for calculation.

The Foundation: General Tort Law and Presumption of Negligence

Before delving into Article 102, it's worth noting that patent infringement is a tort. Under general tort law (Civil Code Article 709), a person who intentionally or negligently infringes the rights of another is liable to compensate for the damage caused thereby. In the patent context, Article 103 of the Patent Act aids the patentee by establishing a presumption that an infringer has acted negligently. This presumption arises from the fact that granted patents are published and thus publicly accessible, imputing a general awareness of their existence. This shifts the burden to the infringer to prove they were not negligent, which can be a difficult task.

The core challenge in patent damages, however, often lies not in proving negligence but in quantifying the financial harm. Unlike damage to tangible property, patent infringement harm often manifests indirectly through lost market opportunities, reduced sales, or price erosion, making direct causation and precise calculation difficult. Article 102 seeks to address this.

There has been an underlying jurisprudential discussion in Japan concerning the fundamental nature of damages under Article 102:

  • One view holds that Article 102 primarily serves to ease the patentee's burden of proving "lost profits" (isshitsu rieki) as traditionally understood under general tort law—that is, profits the patentee would have made but for the infringement.
  • Another, increasingly influential perspective, sometimes referred to as the "lost market opportunity" (shijō kikai) view, takes a more normative approach. It considers that the infringement itself deprives the patentee of their exclusive market opportunity, and this loss itself constitutes the damage. This view may also implicitly incorporate policy considerations such as deterrence, as merely compensating for provable lost profits might not adequately discourage infringement if such profits are hard to prove or if the infringer's gains are substantial.

Navigating Article 102: Frameworks for Calculating Damages

Article 102 of the Japanese Patent Act provides several distinct methodologies for a patentee to claim damages:

I. Patentee's Lost Profits Based on Infringer's Sales Volume (Article 102(1))

This provision, introduced in a 1998 amendment, allows a patentee to claim damages based on their own lost profits, calculated using the infringer's sales volume. The formula can be conceptualized as:

(Patentee's profit per unit of its product) × (Quantity of infringing articles assigned (sold) by the infringer - Quantity that the patentee would have been unable to sell due to circumstances other than the infringement)

The quantity based on the infringer's sales is, however, capped by the patentee's capacity to manufacture or otherwise supply the patented products.

  • Rationale: This provision was intended to move away from often "all or nothing" outcomes in pre-1998 lost profit calculations. It allows for a more nuanced apportionment by enabling the infringer to prove certain "circumstances preventing sale" (the proviso) that would have limited the patentee's sales even in the absence of infringement.
  • Patentee's Capacity: The infringer's sales volume used in the calculation cannot exceed the patentee's own capacity to produce or sell its products.
  • The Proviso – "Circumstances Preventing Sale by the Patentee": This allows for a deduction from the infringer's sales volume. Such circumstances can include:
    • The infringer's own marketing efforts, brand strength, or unique sales channels.
    • Differences in price, design, or other non-patented features of the infringing product that made it more attractive to some buyers.
    • The presence of non-infringing competing products in the market that would have captured some of the sales even if the infringement had not occurred.
      A notable case concerning a chair-type massage machine (Intellectual Property High Court, September 25, 2006) saw a very high proportion (99%) of the infringer's sales attributed to such circumstances, significantly reducing the damages awarded under this provision.
  • "Things the Patentee Could Have Sold": An interesting point arose in a Tokyo High Court decision on June 15, 1999 (related to "Sumitomo-Metal" case materials), where the court considered that this provision could potentially cover the patentee's sales of its competing products, even if those competing products were not embodiments of the patent in suit, provided they were in direct market competition with the infringing product. The logic is that, but for the infringement, some demand for the infringing product might have shifted to the patentee's alternative offering. This remains a somewhat controversial interpretation as it could be seen as compensating for losses in a non-patented product market.

II. Infringer's Profits as a Measure of Patentee's Damages (Article 102(2))

This provision establishes a rebuttable presumption that the amount of profit gained by the infringer through the infringing act is the amount of damage suffered by the patentee.

  • Rationale: This helps the patentee in situations where their own lost profits are difficult to quantify or are smaller than the infringer's gains. It prevents the infringer from retaining profits unjustly earned through infringement.
  • Rebuttable Presumption: The infringer can rebut this presumption. If the infringer can prove that the patentee's actual loss was less than the infringer's profit, the damages awarded may be reduced. For example, the infringer might show that the patentee lacked the capacity to make all the sales the infringer made, or that a significant portion of the sales would have gone to other non-infringing competitors.
  • Partial Rebuttal and Contribution Rate (Kiyo-ritsu): Courts have moved towards allowing partial rebuttal. If the patented feature is only one component of a complex infringing product, or if the infringer’s brand reputation, marketing activities, or other non-patented features significantly contributed to the sales and profits of the infringing product, the court may reduce the recoverable damages by applying a "contribution rate." This apportions the infringer's profit to reflect the value actually attributable to the patented invention. (See, e.g., Tokyo District Court, December 26, 2003, in a case concerning a liquid filling device).
  • Does the Patentee Need to Be Practicing the Patented Invention?
    • Historically, Japanese courts often required the patentee to be working the patented invention to invoke Article 102(2). For example, the Tokyo High Court on June 15, 1999 (Sumitomo-Metal materials context), denied the application of Article 102(2) where the patentee was not selling the patented invention itself, even though it sold a competing (non-patented) product.
    • However, a significant shift came with a Grand Panel decision of the Intellectual Property High Court on February 1, 2013 (concerning a disposable diaper disposal container). The IPHC held that the patentee's own working of the invention is not a strict prerequisite for applying Article 102(2). If circumstances exist suggesting that the patentee would have obtained profits if the infringing act had not occurred (i.e., a causal link can be established), then Article 102(2) can be applied. Differences in the business models of the patentee and infringer, or other market factors, would then be considered in the context of rebutting the presumed amount of damages. In the diaper container case, the patentee was importing and selling its product in Japan through a distributor, while the infringer, an ex-distributor, was importing and selling imitation goods.
    • Whether Article 102(2) could apply if a patentee is not engaged in any sales activity at all (e.g., a pure licensor or a university) remains a more open question, though the normative "lost market opportunity" view might support its application even in such scenarios.
  • Calculating the Infringer's "Profit": Marginal vs. Net Profit: There has been an evolution in how the infringer's "profit" is calculated for the purpose of this presumption. While older cases might have focused on the infringer's "net profit" (after deducting all costs, including fixed overheads), the trend has shifted towards using the infringer's "marginal profit." This typically means the infringer's revenue from the infringing products less the variable costs directly attributable to the production and sale of those infringing units. This approach is seen as better reflecting the incremental profit the patentee might have lost, as a patentee already in operation might only incur variable costs to produce additional units to meet demand captured by the infringer. (See, e.g., Tokyo District Court, October 7, 1998; Tokyo District Court, February 8, 2001).

III. Reasonable Royalty as Damages (Article 102(3))

This provision allows the patentee to claim, as damages, an amount equivalent to the remuneration they would have been entitled to receive for granting a license to work the patented invention (i.e., a reasonable royalty).

  • Basis and Evolution: This is not merely a restatement of a right to claim lost license fees under general tort law. Unlike calculating, say, rent for unauthorized use of land based on prevailing market rates, patent royalties are highly context-specific. A 1998 amendment to the Patent Act removed the word "ordinarily" from this provision, signaling that courts are to determine an objectively reasonable royalty on an ex post basis, considering all circumstances of the case, including the profits the infringer actually made from the use of the invention. It's not strictly tied to pre-existing license agreements of the patentee or standard industry rates, though these can be factors.
  • A Guaranteed Minimum? For patent infringement, Article 102(3) is generally regarded as establishing a floor for damages. Unlike trademark law (where a Supreme Court case on March 11, 1997, concerning "Kozosushi," allowed an infringer to escape royalty-equivalent damages by proving the trademark contributed nothing to sales), patented inventions are typically considered to have some inherent value for which compensation in the form of a royalty is due if used without permission. Thus, an argument by the infringer that the patentee suffered "no damage" usually does not entirely defeat a claim under Article 102(3) for patents.
  • Interaction with Deductions under Article 102(1) Proviso: There has been conflicting case law on whether a reasonable royalty under Article 102(3) can be claimed for the portion of the infringer's sales that was deducted under the Article 102(1) proviso (i.e., sales the patentee would not have made anyway). Some courts have allowed it (e.g., the Sumitomo-Metal context case), effectively ensuring a royalty on all infringing sales. Others (e.g., the chair-type massage machine case, IPHC, September 25, 2006) have denied it for those deducted quantities, reasoning that Article 102(1) and Article 102(3) are distinct calculation methods based on different premises, and applying Article 102(3) to sales already excluded under the Article 102(1) proviso could lead to overcompensation beyond actual lost profits. This divergence reflects the underlying tension between the "lost profits" and "lost market opportunity/deterrence" views of damages.
  • Standard Essential Patents (SEPs) and FRAND: For patents declared essential to a standard and committed to being licensed on Fair, Reasonable, and Non-Discriminatory (FRAND) terms, an IPHC Grand Panel decision on May 16, 2014 (concerning smartphone SEPs) held that damages for infringement should generally be limited to an amount equivalent to the FRAND royalty rate. Claims exceeding this would typically not be allowed unless there are special circumstances, such as the infringer being unwilling to take a license on FRAND terms.

IV. Damages Exceeding Reasonable Royalty (Formerly Article 102(4), now typically Article 102(5) due to renumbering)

This provision clarifies that the amount claimable under Article 102(3) (reasonable royalty) is effectively a minimum. If the patentee can prove, under general tort principles (Civil Code Article 709), that their actual damages from the infringement exceed this reasonable royalty amount, they are entitled to claim that higher, proven sum.

V. Court's Discretion in Determining Damages (Article 105-3)

Recognizing that even with the frameworks of Article 102, proving the exact amount of damages can sometimes be extremely difficult due to the nature of the facts, Article 105-3 of the Patent Act grants the court discretion. If it is found that damage has occurred but proving the precise amount is exceptionally challenging, the court may determine a "substantial and appropriate amount of damages" based on the overall oral arguments and the results of evidence examination.

Conclusion

Article 102 of the Japanese Patent Act provides a multifaceted toolkit for patentees seeking monetary compensation for infringement. It offers several presumptions and calculation methods designed to ease the often significant burden of proving damages in patent cases. These provisions, covering the patentee's lost profits, the infringer's profits, and reasonable royalties, reflect an ongoing effort by the Japanese legal system to ensure that patentees receive fair compensation and that the value of patent rights is adequately protected. The jurisprudence in this area continues to evolve, particularly concerning the interplay between these different damage calculation methods and the fundamental concepts of what constitutes compensable harm in the context of intangible intellectual property rights.