Early Warning: Claiming Compensation for Pre-Grant Patent Use in Japan and Calculating Damages

For innovators, the period between filing a patent application and the actual grant of the patent can be a time of significant vulnerability. While the "patent pending" status offers some notice to the public, what happens if third parties begin commercially exploiting your invention before your exclusive rights are officially conferred? Japanese patent law provides a specific mechanism for applicants to seek monetary relief for such pre-grant use, distinct from the damages available for post-grant infringement. Understanding both these avenues—compensation under Article 65 for pre-grant use and damages under Article 102 for post-grant infringement—is crucial for effectively protecting and monetizing innovations in Japan.

Securing Compensation for Pre-Grant Use: The Power of Article 65

Once a patent application is filed in Japan, it is typically "laid open" for public inspection (shutsugan kōkai) 18 months from the filing date or priority date. Applicants can also request an earlier laying-open (sōki kōkai). This public disclosure serves to disseminate technical information but also triggers a potential right for the applicant to claim compensation from those who commercially work the invention thereafter, even before the patent is granted. This right is established under Article 65 of the Japanese Patent Act.

Essential Conditions for Claiming Pre-Grant Compensation:

To successfully claim compensation under Article 65(1), several conditions must be met:

1. Laying-Open of the Application: The patent application must have been laid open to the public. This is the event that puts the world on notice of the pending invention.
2. Commercial Working by a Third Party: A third party must have worked the invention "in the course of business" (gyō to shite) after the laying-open of the application and before the registration of the patent grant.
3. Warning Letter or Actual Knowledge:
   • The applicant must have sent a formal "warning letter" (keikoku) to the third party. This letter must present documents describing the content of the invention as claimed in the laid-open application. The right to compensation then accrues for working that occurs after this warning.
   • Alternatively, if the third party knew that the invention they were working was indeed the one covered by the laid-open patent application, compensation can be claimed for working that occurred after they gained such knowledge, even without a formal warning letter.
4. Consistency of Claims: The invention as worked by the third party must fall within the scope of the claims as they existed in the laid-open application at the time of the warning (or when the third party gained knowledge). Furthermore, the invention must also fall within the scope of the claims of the patent as eventually granted. If the granted claims are narrower than the laid-open claims, compensation can only be sought if the third party's activities also fall within the narrower, granted claims.

The Impact of Claim Amendments After Warning:

A practical issue arises if the patent applicant amends the claims after issuing a warning letter but before the patent is granted. Is a new warning, reflecting the amended claims, necessary? Japanese case law, notably a Supreme Court decision from July 19, 1988 (concerning a utility model, but with principles broadly applicable to patents ), provides guidance:

• If an amendment expands the scope of the claims or changes them in such a way that the third party's activities only fall within the scope after the amendment, a new warning reflecting the amended claims is generally required to claim compensation for use under those broader or changed claims.
• However, if the third party's activities were already within the scope of the claims before a narrowing amendment, and those activities remain within the (now narrower) amended claims, a new warning is generally not required.
  The underlying principle is to ensure fairness and prevent unfair surprise to the third party; they must have adequate notice of the scope of the invention for which compensation is being sought.

Nature and Timing of the Compensation Claim:

• Amount: Article 65(1) stipulates that the applicant can claim "an amount of money equivalent to the amount the applicant would be entitled to receive for the working of the invention if it were patented." This is typically interpreted as a reasonable royalty for the use of the invention during the pre-grant period. It is not equivalent to the potentially broader damages (like lost profits) available for post-grant infringement.
• Exercising the Right: Crucially, this right to compensation, although accruing from the time of warning/knowledge after laying-open, can only be formally exercised (i.e., a lawsuit filed or payment demanded) after the patent has been granted and registered (Article 65(2)).
• Extinction of the Right: If the patent application is ultimately abandoned, withdrawn, finally rejected by the JPO, or if an issued patent is later invalidated ab initio (from the beginning), the right to claim compensation under Article 65 is deemed never to have arisen (Article 65(5)). Any compensation already received might then be subject to restitution.

Calculating Damages for Post-Grant Infringement: The Framework of Article 102

Once a patent is granted and registered, any unauthorized commercial working of the patented invention constitutes direct infringement, giving rise to a claim for damages under civil tort law (Civil Code Art. 709). Additionally, Article 103 of the Patent Act establishes a presumption of negligence on the part of the infringer. However, proving the exact quantum of damages, particularly lost profits, can be challenging. To assist patentees, Article 102 of the Patent Act provides several bases for calculating or presuming damages.

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

This is often the primary method patentees consider. The provision allows the patentee to claim damages calculated as:
(Number of infringing units transferred by the infringer) x (Patentee's profit per unit of their *own* product embodying the invention)

• Marginal Profit: The "profit per unit" for the patentee is generally interpreted as their marginal profit (sales revenue per unit minus variable costs per unit), not their net profit (which would deduct fixed overheads).
• Limitations and Deductions:
  • Patentee's Capacity: The total amount claimable under this head is capped by the patentee's own capacity to make and/or sell the patented product. If the infringer sold more units than the patentee could have realistically produced and sold, lost profits cannot be claimed for that excess.
  • "Circumstances Preventing Sale": There's a crucial proviso. If there are "circumstances" under which the patentee would not have been able to sell some or all of the units sold by the infringer (even if within their capacity), the claimed amount is reduced accordingly. Such circumstances can include:
    • The infringer's own marketing efforts, brand strength, or lower pricing.
    • The presence of non-infringing alternative products in the market.
    • Specific features of the infringing product (other than the patented invention) that attracted customers.
• Patentee Not Working the Invention: What if the patentee is a non-practicing entity or was not selling a product embodying this specific patent? Can they still claim lost profits under this provision? Historically, this was difficult. However, legal commentary and some court trends suggest that if the patentee was selling a competing product (even if not embodying the patent in suit, but which lost sales due to the infringing product), there might be a basis for a claim, although the causal link becomes more complex to prove.

2. Presumption Based on Infringer's Profits (Article 102(2))

This provision states that the profit earned by the infringer through their infringing acts is presumed to be the amount of damage suffered by the patentee.

• Infringer's Marginal Profit: Similar to Article 102(1), the "profit" here is also generally considered to be the infringer's marginal profit from the infringing products.
• Rebuttable Presumption: This is a rebuttable presumption. The infringer can argue, for example, that the patentee would not have made those profits even if the infringement hadn't occurred (e.g., if the patentee was not working the invention or lacked market presence).
  • The IP High Court Grand Panel, in the Dust Storage Equipment Case (Judgment of February 1, 2013), clarified that the patentee actually working the invention is not an absolute prerequisite for applying Article 102(2), provided it can be shown that the patentee would likely have earned profits (e.g., through licensing or their own sales) had the infringement not occurred.
• Apportionment (Contribution Rate): A significant portion of the infringer's profit might be due to factors other than the patented invention (e.g., their own branding, other non-patented features, marketing efforts). Courts will often seek to apportion the infringer's profits, attributing only the portion reasonably resulting from the use of the patented invention to the presumed damages.

3. Reasonable Royalty as a Minimum (Article 102(3))

Regardless of whether lost profits (either patentee's or infringer's) can be proven, the patentee is always entitled to claim an amount equivalent to a reasonable royalty for the working of the patented invention.

• A "Floor" for Damages: This is often viewed as the minimum level of compensation.
• Flexibility in Royalty Determination: A crucial amendment to this provision removed the word "normally" (tsūjō) from the phrase "amount of money the patentee would normally be entitled to receive." This change, effective from 1999, granted courts greater flexibility to determine a reasonable royalty rate based on the specific circumstances of the case, the invention's technical and economic value, the nature of the infringement, and potentially a punitive or deterrent element, rather than being strictly bound by established industry average royalty rates. This allows for a royalty that adequately compensates the patentee for the unauthorized use.

4. Combining Damage Calculation Methods

A complex issue is whether a patentee can combine claims under different subsections of Article 102. For example, if under Article 102(1), a portion of the infringer's sales is deducted because it exceeded the patentee's capacity or due to other "circumstances," can the patentee claim a reasonable royalty under Article 102(3) for that deducted portion?
Legal opinion and some court decisions in Japan lean towards allowing such a combination. The rationale is that even if the patentee could not have made those specific sales themselves, they were still deprived of the opportunity to license the invention for those sales. Thus, they could potentially claim lost profits under Article 102(1) for the sales they would have made, and a reasonable royalty under Article 102(3) for the remaining infringing sales.

Strategic Implications for Innovators

The Japanese patent system provides distinct avenues for innovators to seek monetary relief both before and after a patent is granted.

• Pre-Grant: Requesting early laying-open of a patent application and issuing timely, well-documented warning letters to potential users of the invention are critical steps to establish a right to compensation under Article 65. Diligent monitoring of the market post-publication is essential.
• Post-Grant: In the event of infringement, patentees have several statutory tools under Article 102 to help quantify their damages, ranging from their own lost profits to the infringer's profits or a reasonable royalty. The choice of which measure(s) to pursue will depend heavily on the specific facts, such as the patentee's own market activities, their production capacity, and the infringer's profitability.

Navigating these provisions requires a thorough understanding of their conditions and the evolving case law interpreting them. For businesses seeking to enforce their patent rights or defend against claims in Japan, expert legal counsel is indispensable to effectively leverage these complex but vital legal mechanisms.