How Are Damages Calculated in Japanese Patent Infringement Cases, and What Presumptions Apply (e.g., Lost Profits, Infringer's Profits, Reasonable Royalty)?

Japanese Attorney at Law - Bengoshi L.L.

• 13 min read

When a patent is infringed, one of the primary remedies sought by the patentee is monetary compensation for the harm suffered. In Japan, the calculation of damages in patent infringement cases is fundamentally based on general tort principles under the Civil Code, but it is significantly supplemented by specific provisions in the Patent Act, particularly Article 102. These provisions aim to ensure adequate compensation for the patentee while also alleviating the often considerable burden of proving the exact quantum of damages. Understanding this framework, including the various presumptions available to patentees, is essential for anyone involved in patent enforcement or defense in Japan.

This article explores how damages are determined in Japanese patent infringement cases, focusing on the key provisions of Article 102 of the Patent Act, the presumption of negligence, and how these principles compare to approaches in other jurisdictions like the United States.

General Basis for Damages and the Presumption of Negligence

The foundational basis for claiming damages due to patent infringement in Japan is Article 709 of the Civil Code, which governs compensation for unlawful acts (torts). Patent infringement is considered a tort. To succeed under Article 709, the patentee must typically prove the infringer's act, the damages suffered, causation, and the infringer's intent or negligence.

However, Japanese Patent Act Article 103 provides a crucial procedural advantage to the patentee: an infringer is presumed to have been negligent in committing the act of infringement. This presumption significantly eases the patentee's burden. In practice, it is very difficult for an infringer to rebut this presumption. Even reliance on a first-instance court judgment of non-infringement (which is later overturned on appeal) has been found insufficient to negate negligence for acts committed after that initial judgment (e.g., Tokyo High Court, January 27, 1994, "Two-Person Power Tea Harvester" case).

The rationale for this strong presumption is twofold: patents are publicly registered and published in the official Patent Gazette (特許公報 - Tokkyo Kōhō), providing constructive notice to the public of the patent's existence and scope. Furthermore, even if an infringer could prove a lack of negligence, they might still be liable for unjust enrichment equivalent to a reasonable royalty. Thus, the practical impact of the negligence presumption often shifts the focus to the quantum of damages rather than the existence of fault, although a finding of minor negligence (as opposed to gross negligence or intent) can be a factor considered by courts under Article 102(4) for potentially reducing damages above a reasonable royalty.

It's worth noting that this presumption of negligence is tied to the public notification of the patent right. For infringing acts that occur after the patent is granted but before the official Patent Gazette publishing the grant is issued, Article 103 may not fully apply, and specific proof of the infringer's negligence might be required.

Patent Act Article 102: Special Provisions for Calculating Damages

Article 102 of the Japanese Patent Act sets forth three main methods for calculating (or, more accurately, presuming) the amount of damages suffered by a patentee due to infringement. These provisions are designed to address the inherent difficulties patentees face in precisely quantifying their losses.

A. Article 102(1): Patentee's Lost Profits Based on Infringer's Sales (逸失利益額の推定 - isshitsu rieki-gaku no suitei)

This provision allows the patentee to claim damages based on their own lost profits, calculated by multiplying the number of infringing articles sold by the infringer by the patentee's profit per unit of their own product.

Mechanism and Requirements:
The patentee can assert that their damages are the sum derived from:
(Number of infringing units transferred by the infringer) x (Patentee's profit per unit of its own product that would have been sold if not for the infringement)

This presumed amount is, however, capped by the patentee's capacity to manufacture or sell their product (実施の能力 - jisshi no nōryoku). If the patentee could not have produced or sold the quantity equivalent to the infringer's sales, their lost profit claim is limited accordingly.

  • Patentee's Product: Does the patentee's "own product" need to be an embodiment of the patented invention? The prevailing judicial view is generally no. If the patentee sells a product that competes in the same market as the infringing product, that competing product can serve as the basis for calculating lost profits, even if it's not covered by the patent in suit. The Tokyo High Court decision of June 15, 1999 (the "Heat Storage Material Manufacturing Method" case) supports this. The underlying logic is that the infringement diverted sales that would have otherwise gone to the patentee's competing product.
  • Profit Per Unit: This is typically calculated as marginal profit (限界利益 - genkai rieki). This means the patentee's sales price per unit less the variable costs per unit (e.g., raw materials, direct labor directly attributable to producing one more unit). Fixed costs (such as rent, general administrative expenses, or depreciation on already-invested capital equipment) are generally not deducted from the patentee's per-unit profit in this calculation. The rationale is that these fixed costs would have been incurred by the patentee regardless of the infringement, and deducting them from the lost profit calculation would lead to undercompensation, as the patentee needs to cover these fixed costs through their sales.
  • Infringer's Transferred Units: This includes products made by a patented process. It generally applies to "transferred" goods, so it might not directly cover leased items, although courts might apply it by analogy if both parties were engaged in leasing rather than selling.
  • Patentee's Capacity: If the patentee is, for example, an individual inventor with no manufacturing or sales infrastructure, they may not be able to demonstrate lost sales under this provision.

Rebuttal by the Infringer (Proviso to Article 102(1)):
The infringer can rebut this presumption wholly or in part by proving the existence of circumstances that would have prevented the patentee from making those sales even if there had been no infringement. Such circumstances could include:

  • The presence of other non-infringing alternative products in the market.
  • Differences in price, quality, or features between the patentee's product and the infringing product, suggesting that not all of the infringer's customers would have purchased from the patentee.
  • The infringer's own marketing efforts, brand reputation, or business channels contributing to their sales independently of merely diverting sales from the patentee.
    The burden of proving these rebutting circumstances lies with the infringer.

B. Article 102(2): Presumption Based on Infringer's Profits (侵害者利益額の推定 - shingaisha rieki-gaku no suitei)

This provision allows the patentee to claim damages based on the profits the infringer earned from the infringing activity. The amount of profit gained by the infringer through the act of infringement is presumed to be the amount of damage suffered by the patentee or exclusive licensee.

  • Condition: Patentee's Working of the Invention: Japanese courts and prevailing academic opinion generally require that the patentee (or exclusive licensee) must be working the patented invention (or at least a competing product, similar to the requirement under Article 102(1)) for this presumption to apply. If the patentee is not exploiting the patent in the market and therefore not directly losing sales or market share, this provision—often viewed as an alternative method to estimate the patentee's lost profits—is typically considered inapplicable (e.g., Tokyo District Court, September 22, 1962, "Dual Gun Toy" case).
  • Calculating Infringer's Profits: The profit is generally calculated as the infringer's revenue from the infringing products minus the expenses directly attributable to the infringing activity. The trend in Japanese courts is to allow deduction of the infringer's marginal costs associated with the infringing products, rather than fully allocated fixed overheads, unless those fixed costs demonstrably increased due to the infringing activity (e.g., Tokyo District Court, July 16, 1999, "Rough Road Escape Tool" case).
  • Rebuttal by the Infringer: While historically difficult to rebut if the patentee was working the invention, recent practice suggests that, similar to Article 102(1), the infringer can argue that not all of their profits would have accrued to the patentee (e.g., due to market competition, the infringer's own non-infringing contributions to the product's appeal, etc.), leading to a partial rebuttal of the presumed damage amount.

C. Article 102(3): Reasonable Royalty (相当実施料額 - sōtō jisshiryō-gaku)

This is often considered the baseline or "floor" for damages. It allows the patentee to claim 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).

  • Availability: This measure of damages can be claimed even if the patentee cannot prove lost profits under Article 102(1) (e.g., due to lack of capacity or inability to prove diversion of sales) or if the infringer made no profit (making Article 102(2) unhelpful), or even if the patentee was not working the invention themselves.
  • Relationship with Article 102(1) and (2): If the presumptions of lost profits under Article 102(1) or infringer's profits under Article 102(2) are partially rebutted by the infringer, can the patentee then claim a reasonable royalty for the portion of infringement for which lost profits were not proven? The prevailing judicial view has been yes; Article 102(3) can supplement the other provisions (e.g., Tokyo High Court, "Heat Storage Material Manufacturing Method" case). However, some more recent court decisions have suggested that if actual lost profits under Article 102(1) are determined (even if partially rebutted), that represents the true measure of harm, and the "default" reasonable royalty method of Article 102(3) should not be additionally applied to the rebutted portion. This remains an area of some debate.
  • Calculating a "Reasonable Amount": The term "normally" (通常 - tsūjō) was removed from this provision by a 1998 amendment. This change signaled that courts should not be overly constrained by standard industry royalty rates found in typical negotiated licenses. Instead, the royalty should be determined based on the specific value and circumstances of the infringed patent and the infringing act.
    Factors considered in determining a "reasonable royalty" include:
    • Any established royalty rates for the patent in question, if available from prior licenses.
    • Prevailing royalty rates in the relevant industry (as a reference point).
    • The nature of the patented invention (e.g., pioneering invention, minor improvement).
    • The contribution of the patented invention to the infringer's product and profits.
    • The terms of a hypothetical negotiation between a willing licensor and a willing licensee, at the time infringement began, assuming the patent was known to be valid and infringed.
      Courts have acknowledged that a royalty determined in the context of proven infringement (where validity and infringement are established) may reasonably be higher than rates negotiated under conditions of uncertainty and litigation risk (e.g., Tokyo High Court, September 30, 2004, "Toy Gun with Automatic Bullet Feed Mechanism II" case).

D. Article 102(4): Discretionary Reduction for Lack of Intent or Gross Negligence

This provision allows the court, when calculating damages (presumably under Articles 102(1) or 102(2)), to take into account the absence of intent or gross negligence on the part of the infringer. However, this discretion is limited: the court cannot reduce the amount of damages below the reasonable royalty figure that would be determined under Article 102(3). This ensures that the patentee always receives at least a fair royalty for the unauthorized use of their invention.

Specific Issues in Damage Calculation

Several specific factual scenarios can complicate damage calculations:

A. Patented Feature is Only Part of Infringing Product

If the patented invention constitutes only one component or feature of a larger, multi-component infringing product:

  • Apportionment (寄与率/度 - kiyo-ritsu/do - Contribution Rate): Courts will often attempt to apportion the damages to reflect the contribution of the patented feature to the overall value or sales of the infringing product.
    • Under Article 102(1) (Lost Profits): The focus is on how many of the infringer's sales were driven specifically by the patented feature. This is often treated as an issue for rebuttal by the infringer under the proviso to Article 102(1); the infringer bears the burden of showing that sales were attributable to other, non-infringing features. Some courts explicitly calculate a "contribution rate" (e.g., IP High Court, September 25, 2006, "Air Massage Device" case, which framed it as a rebuttal issue).
    • Under Article 102(2) (Infringer's Profits): Similarly, the infringer's profits may be apportioned based on the contribution of the patented feature to those profits.
    • Under Article 102(3) (Reasonable Royalty): The royalty base (e.g., the sales price of the entire product versus the value of the patented component) and the royalty rate itself should be adjusted to reflect the value contributed by the patented feature.

B. Multiple Patentees or Rights Involved

  • Infringing Product Embodies Multiple Patents: If an infringing product uses technologies covered by several different patents (owned by the same or different patentees), the damages attributable to the infringement of each patent must be assessed. While this doesn't mean the infringer pays double for the same economic loss, they are liable for the harm caused by infringing each patent, which may involve apportioning the overall sales/profits based on the relative contribution or value of each patented technology.
  • Infringed Patent is Subject to an Exclusive or Sole Non-Exclusive License:
    • For lost profits under Article 102(1) or infringer's profits under Article 102(2), if only the licensee is working the invention, then typically only the licensee can claim these types of damages. Any royalties the licensee would have owed to the patentee on those lost sales would usually be deducted from the licensee's recovery.
    • For a reasonable royalty under Article 102(3), if a registered exclusive license is in place, the exclusive licensee is often the party entitled to claim this. The patentee might then have a contractual claim against the licensee for their share of such recovery, or a direct claim against the infringer for lost royalties if the infringement diminished the licensee's capacity to pay agreed-upon royalties.
  • Infringed Patent is Jointly Owned: Each co-owner can sue for damages based on their share of the harm caused. This is not necessarily a simple pro-rata division of total damages based on ownership percentage. Instead, it can depend on each co-owner's actual working of the patent, their individual lost market opportunities, and their contribution to the commercialization. For example, if only some co-owners are actively working the invention, they might be entitled to the bulk of the lost profits, while non-working co-owners might primarily be entitled to a share of a reasonable royalty (e.g., IP High Court, April 28, 2010, "Steel Column Alignment Device" case).

C. Multiple Infringers in a Distribution Chain

If an infringing product passes through multiple hands in a distribution chain (e.g., manufacturer → wholesaler → retailer), several parties may be liable:

  • Parties in Concert (e.g., Manufacturer and Initial Distributor): If multiple entities act jointly in the initial infringing activity (e.g., a manufacturing company and its dedicated sales subsidiary), they are typically considered joint tortfeasors and are jointly and severally liable for the entire damage caused by those initial sales (under Article 719 of the Civil Code).
  • Sequential Infringers in the Chain:
    • Lost Profits (Article 102(1)): For a single unit sold to an end-user, the patentee has lost one potential sale. While the patentee can sue any infringer in the chain whose actions contributed to this lost sale, they cannot recover the same lost profit multiple times for that single unit. The infringers in the chain are often viewed as jointly and severally liable for that single lost profit amount related to each unit.
    • Infringer's Profits (Article 102(2)): Each entity in the distribution chain (manufacturer, wholesaler, retailer) typically earns its own distinct profit margin on the infringing product. It has been argued, and sometimes accepted by courts, that the patentee may be able to claim these respective (and not necessarily overlapping) profits from each infringer in the chain (e.g., Tokyo District Court, February 8, 2001, "Toy Gun with Automatic Bullet Feed Mechanism" case). However, this might be limited if the patentee themselves only operates at one level of the distribution chain (e.g., if the patentee is only a manufacturer, their "lost profit" might not extend to the retailer's margin).
    • Reasonable Royalty (Article 102(3)): The patentee is generally entitled to one reasonable royalty per infringing unit that is made, used, or sold. If one infringer in the distribution chain pays this royalty for a particular unit, other infringers in the chain for that same unit might be relieved of liability for this head of damage, as the patentee has received their due compensation for that unit's unauthorized existence in commerce. The infringers are often considered jointly and severally liable for this royalty amount.

Other Forms of Monetary Compensation

It's important to briefly distinguish damages for patent infringement from two other related monetary claims:

  • Unjust Enrichment (民法703条 - Minpō Nana-hyaku-san-jō): If patent infringement occurs but the infringer can prove a lack of negligence (rebutting the Article 103 presumption), the patentee may still claim unjust enrichment. This is typically limited to an amount equivalent to a reasonable royalty. A key practical advantage of an unjust enrichment claim is its longer statute of limitations (generally 10 years under the Civil Code, compared to 3 years from knowledge of damage and infringer for tort claims).
  • Compensation for Published Applications (特許法65条 - Tokkyohō Rokujūgo-jō): If a third party works an invention after the patent application has been laid open for public inspection (published) but before the patent is granted, the applicant can, after the patent is granted, claim compensation equivalent to a reasonable royalty for that pre-grant use. This right is conditional upon the applicant having given a written warning to the user, or the user knowing that the invention was the subject of a published application.

Comparison with U.S. Damage Calculation in Patent Cases

The Japanese approach to calculating patent infringement damages has both similarities and notable differences compared to U.S. practice:

  • Lost Profits: U.S. law also allows for recovery of lost profits, often guided by the multi-factor Panduit test (requiring proof of demand for the patented product, absence of acceptable non-infringing substitutes, the patentee's manufacturing and marketing capability to exploit the demand, and the amount of profit the patentee would have made).
  • Reasonable Royalty: A reasonable royalty is also a statutory minimum for damages in the U.S. (35 U.S.C. § 284). It is typically determined based on a hypothetical negotiation between the parties at the time infringement began, often considering the various factors outlined in Georgia-Pacific Corp. v. U.S. Plywood Corp.
  • Infringer's Profits: A key difference is that U.S. patent law (since a 1946 statutory amendment) generally does not allow the patentee to recover the infringer's profits as a direct measure of damages in utility patent cases (though infringer's profits can be relevant in determining a reasonable royalty or are available for design patent infringement). Japan's Article 102(2) explicitly provides for this.
  • Willful Infringement and Enhanced Damages: U.S. law permits courts to enhance damages up to three times the compensatory amount for willful infringement (35 U.S.C. § 284). Japan does not have a direct statutory equivalent for punitive or treble damages, although, as noted, a court-determined "reasonable royalty" under Article 102(3) in an infringement context can sometimes be set at a higher level than a standard negotiated rate.
  • Statutory Presumptions: Japan's Article 102 provides explicit statutory presumptions for calculating different heads of damage, whereas U.S. law relies more on established case law frameworks and evidentiary burdens for proving lost profits or determining a reasonable royalty.

Conclusion

The Japanese Patent Act, particularly through Article 102, provides a structured and somewhat plaintiff-friendly framework for calculating damages in patent infringement cases. The provisions for presuming lost profits based on the infringer's sales or the infringer's own profits, alongside the baseline of a reasonable royalty, aim to ensure that patentees receive fair compensation for the unauthorized use of their inventions while mitigating some of the difficulties in proving complex economic losses. The strong presumption of infringer negligence further supports the patentee's position. For businesses involved in patent disputes in Japan, whether as patentees or accused infringers, a clear understanding of these specific damage calculation rules, their underlying rationales, and how they are applied by Japanese courts is indispensable for assessing potential liability or recovery and for formulating effective legal strategies.