Calculating Patent Infringement Damages in Japan: Stacking Royalties on Rebutted Profits?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read
Slide summarising Japan Patent Act Article 102 damage theories and the 2022 Grand Panel “stacking” test for reasonable royalties.

TL;DR

  • Japan’s Patent Act Article 102 offers three damage theories: lost profits, infringer’s profits, and reasonable royalties.
  • The IP High Court Grand Panel (Oct 20 2022) held that royalties may be “stacked” onto profits the infringer proved were not lost sales—but only where a plausible lost-licensing opportunity exists.
  • Stacking is allowed for rebuttals based on market differences or patentee capacity, but not where the patented feature’s value is negligible.
  • Litigants must analyse why Article 102(2) was rebutted and whether licensing would realistically have occurred.

Table of Contents

  1. Overview of Patent Act Article 102: Damages Calculation Methods
  2. The Core Issue: Applying Royalties to Rebutted Infringer’s Profits (Art. 102(2))
  3. The IP High Court Grand Panel Decision (October 20 2022)
  4. Conclusion

Quantifying damages is a critical aspect of patent infringement litigation worldwide. In Japan, Article 102 of the Patent Act (特許法 - Tokkyohou) provides the primary framework, offering several methods for calculating damages aimed at compensating the patent holder. These methods often involve presumptions based on the patentee's lost profits or the infringer's gained profits. However, these presumptions can be rebutted by the infringer, leading to complex questions about how the final damage award should be calculated.

A significant point of debate historically concerned whether a patentee could claim reasonable royalties (under Article 102(3)) for the portion of infringing sales where the presumption based on the infringer's profits (Article 102(2)) was successfully rebutted. A landmark decision by the Grand Panel (大合議 - daigougi) of Japan's Intellectual Property (IP) High Court on October 20, 2022 (Reiwa 4), brought much-needed clarity to this issue, establishing a nuanced approach based on the concept of lost licensing opportunities.

Overview of Patent Act Article 102: Damages Calculation Methods

Article 102 provides patentees (or exclusive licensees) with several avenues to claim damages from an infringer:

  1. Article 102(1) - Patentee's Lost Profits (per unit): This clause allows the patentee to claim damages calculated as: (Quantity of infringing articles assigned by the infringer) × (Profit per unit the patentee would have gained if they had sold their own patented articles).
    • Rebuttal: The infringer can reduce this amount by proving circumstances preventing the patentee from selling the equivalent quantity, such as limitations in the patentee's production or sales capacity, or the existence of competing products (market factors).
    • 2019 Amendment (Art. 102(1) Item 2): An important revision in 2019 (令和元年改正法 - Reiwa gannen kaisei hou) explicitly added Item 2 to this paragraph. It clarifies that for the quantity the patentee could not have sold due to capacity limits or other reasons, damages equivalent to a reasonable royalty can still be claimed. This legislatively endorsed a "stacked" approach for Article 102(1).
  2. Article 102(2) - Infringer's Profits: This clause establishes a presumption that the profit earned by the infringer through the act of infringement is equal to the amount of damages suffered by the patentee. The patentee needs to establish the infringer's sales and profit margin; the burden then shifts to the infringer to rebut the presumption.
    • Rebuttal (推定覆滅 - suitei fumetsu): The infringer can rebut this presumption, in whole or in part, by demonstrating that the patentee would not have realized those profits even without the infringement. Common grounds for rebuttal include:
      • Market differences (e.g., patentee and infringer operate in different markets).
      • Existence of non-infringing competing products.
      • The infringer's own business efforts (brand power, advertising).
      • The specific features of the infringing product unrelated to the patent (which contributed to its sales).
      • The patented invention covering only a part of the infringing product, with limited contribution to overall profit (apportionment).
  3. Article 102(3) - Reasonable Royalty: This clause provides a floor for damages. The patentee can claim an amount equivalent to the royalty they would have been entitled to receive for licensing the patented invention. This can be claimed even if damages under paragraphs (1) or (2) are difficult to prove or are rebutted entirely. The royalty rate is determined based on various factors, including actual license agreements, industry standards, the invention's value, and the specifics of the infringement. Courts often consider that a royalty rate set after infringement has been established should be higher than a rate negotiated beforehand under uncertainty.

The Core Issue: Applying Royalties to Rebutted Infringer's Profits (Art. 102(2))

Before the 2022 Grand Panel decision, a significant question lingered: If an infringer successfully rebuts the presumption under Article 102(2) for a certain portion of their profits (e.g., arguing the patentee couldn't have made those sales anyway, or the patent contributed little to those profits), could the patentee still claim reasonable royalties under Article 102(3) for that rebutted portion?

This is often referred to as "stacking" (重畳適用 - juujou tekiyou) the reasonable royalty calculation onto the part where the infringer's profit presumption was overturned.

  • Historical Context: Previous court decisions were inconsistent, but many tended against allowing such stacking for Article 102(2) rebuttals (unlike the situation under Article 102(1) where capacity limitations were a clearer basis for applying a royalty logic). Cases like the Solid Golf Ball decision (IP High Court, January 24, 2012) were seen as leaning against this stacking.
  • Legislative vs. Judicial Approach: When the Patent Act was amended in 2019, Article 102(1) was explicitly revised (adding Item 2) to permit combining lost profits and royalty calculations based on capacity/market limitations. However, Article 102(2) was not similarly amended. Explanations at the time suggested that lawmakers expected the courts could reach a similar outcome for Article 102(2) through judicial interpretation, recognizing the different conceptual bases (patentee's lost sales vs. infringer's unjust enrichment) but aiming for practical consistency where appropriate.

This set the stage for the IP High Court to provide definitive guidance via a Grand Panel ruling.

The IP High Court Grand Panel Decision (October 20, 2022)

This pivotal case involved a dispute over patents related to massage chairs, specifically a mechanism for massaging the forearms ("Patent C"). The patentee ("Company X") sued an alleged infringer ("Company Y"). Company X primarily sought damages based on Company Y's profits under Article 102(2).

Infringement Found, but Presumption Rebutted:

The IP High Court, overturning the lower court, found that Company Y's products did infringe Patent C. It also found that Article 102(2) was potentially applicable because Company X sold competing products in some of the same markets as Company Y. However, the court accepted Company Y's arguments for partially rebutting the presumption that all of its profits constituted damages to Company X. The grounds for rebuttal were:

  1. Market Non-Identity: Company Y made sales in certain overseas markets where Company X did not sell its competing massage chair. Therefore, Company X could not have lost sales in those specific markets due to Company Y's infringement.
  2. Limited Contribution (Apportionment): The patented forearm massage mechanism was only one feature of the complex, multi-featured massage chairs sold by Company Y. The court found that this specific feature's contribution to the overall customer appeal and profitability of Company Y's chairs was limited.

The Grand Panel's Ruling on Stacking Royalties (Art. 102(3) on Rebutted 102(2)):

The core of the Grand Panel's decision addressed whether Company X could claim reasonable royalties under Article 102(3) for the portions of Company Y's profits where the Article 102(2) presumption had been rebutted due to market non-identity or limited contribution.

The Grand Panel ruled that stacking Article 102(3) onto a rebutted portion of Article 102(2) is permissible, but only under specific circumstances. The court's reasoning was based on distinguishing the conceptual underpinnings of the different damage provisions:

  • Article 102(2) (Infringer's Profit Presumption): Primarily represents damages from lost sales opportunities for the patentee due to the infringer's competing sales.
  • Article 102(3) (Reasonable Royalty): Primarily represents damages from lost licensing opportunities. It serves as a minimum guarantee, compensating the patentee for the unauthorized use for which they could have otherwise charged a royalty.

The court reasoned that a patent holder can potentially benefit from their invention in two ways: by selling the patented product themselves (capturing sales profits) and by licensing the patent to others (earning royalties). Infringement potentially harms both avenues. Therefore, even if the presumption of lost sales profit under Article 102(2) is rebutted for certain infringing units, the patentee might still have suffered a loss because they lost the opportunity to license the patent for those specific units.

The Decisive Test: Could a License Have Been Granted?

Based on this logic, the Grand Panel established a crucial test: For the portion of infringing activity where the Article 102(2) presumption is rebutted, can Article 102(3) damages be awarded if the patentee could plausibly have granted a license for that specific activity?

Applying the Test to the Rebuttal Grounds:

The court then applied this test to the two specific grounds of rebuttal it had accepted:

  1. Rebuttal due to Market Non-Identity: YES, stacking allowed.
    • Reasoning: The fact that Company X wasn't present in certain markets (and thus couldn't lose sales there) was the reason for rebuttal. However, this very lack of market presence does not preclude the possibility that Company X could have licensed Company Y to operate in those markets. Company Y's infringement deprived Company X of this potential licensing revenue. Therefore, a reasonable royalty under Article 102(3) could be claimed for the infringing sales in those specific markets.
  2. Rebuttal due to Limited Contribution (Apportionment): NO, stacking not allowed.
    • Reasoning: Here, the presumption was rebutted because the patented feature (forearm massage) itself contributed only minimally to the value and sales of Company Y's overall product for those units. If the patented invention's contribution is deemed negligible for a certain portion of the infringer's profit calculation under 102(2), the court reasoned, it follows that the patentee could not realistically have expected to receive a meaningful royalty for that specific contribution either. Granting a license implies receiving payment for the value provided by the licensed technology. If that value contribution is effectively zero for the rebutted portion, there is no lost licensing opportunity to compensate via Article 102(3).

Significance and Implications of the Grand Panel Decision

This IP High Court Grand Panel decision is highly significant for patent litigation in Japan:

  1. Alignment and Clarity: It resolves a long-standing ambiguity by affirming that reasonable royalties (102(3)) can be applied to portions where the infringer's profit presumption (102(2)) is rebutted, mirroring the logic legislatively adopted for Article 102(1) in 2019. This brings greater consistency to the damages framework.
  2. Nuanced, Reason-Based Approach: The decision avoids a simple "yes" or "no" to stacking. It mandates a nuanced analysis based on the specific reason why the Article 102(2) presumption was rebutted. This focuses the inquiry on the underlying economic reality: was the patentee deprived of a potential sale, or a potential license, or neither?
  3. Distinguishing Rebuttal Types:
    • Rebuttals based on factors extrinsic to the patent's value in the infringing product (like the patentee's capacity limitations, market differences where the patentee doesn't compete) are more likely to allow stacking under 102(3), as the lost licensing opportunity remains plausible.
    • Rebuttals based on factors intrinsic to the patent's limited role in the infringing product (like minimal technical contribution, apportionment showing the patent drives little value) are less likely to allow stacking, as the premise for a valuable lost licensing opportunity is weakened.
  4. Strategic Litigation Considerations:
    • Patentees: When seeking damages under Article 102(2), patentees should be prepared to argue, in the alternative, for Article 102(3) royalties, particularly emphasizing the lost licensing opportunity for any portion where the 102(2) presumption might be rebutted based on market factors or capacity.
    • Accused Infringers: When arguing for rebuttal under Article 102(2), it's not enough to simply show the patentee wouldn't have made the sale. To defeat a subsequent Article 102(3) claim on the rebutted portion, infringers should also argue why a license wouldn't have been realistically sought or granted for that portion – for instance, by demonstrating the minimal contribution of the patented feature to the product's actual market success or value. Apportionment arguments become particularly crucial not just for reducing 102(2) damages but also for precluding 102(3) stacking.
  5. Focus on Lost Licensing Opportunity: The decision firmly anchors the Article 102(3) calculation in the concept of a lost licensing opportunity. This requires assessing whether, under the specific circumstances of the rebuttal, it was plausible that a license could have been granted.

Conclusion

Calculating patent infringement damages in Japan under Article 102 involves navigating a complex interplay between presumptions based on lost profits (patentee's or infringer's) and reasonable royalties. The IP High Court Grand Panel's decision of October 20, 2022, provides vital clarification on applying reasonable royalties (Art. 102(3)) when the presumption based on the infringer's profits (Art. 102(2)) is partially rebutted. The key takeaway is that such "stacking" is possible, but contingent on the reason for the rebuttal. If the rebuttal relates to factors like different markets or patentee capacity, suggesting a lost licensing opportunity remains viable, royalties may be awarded for the rebutted portion. However, if the rebuttal stems from the patented invention's minimal contribution to the infringing product's value, indicating no realistic licensing opportunity was lost, then stacking reasonable royalties onto that portion is unlikely to be permitted. This nuanced approach requires litigants to carefully consider the economic rationale behind each type of damage claim and the specific facts supporting or negating the possibility of a lost license.