How Are Damages for Patent Infringement Calculated Under Article 102 of the Japanese Patent Act?

When a Japanese patent is infringed, the patentee is entitled to seek monetary compensation for the losses suffered. While the general basis for such claims lies in Article 709 of the Civil Code, which governs tort liability, the Japanese Patent Act provides crucial assistance in Article 102. This article establishes specific presumptions and methodologies for calculating damages, significantly easing the patentee's often challenging burden of proving the quantum of their loss. Understanding these provisions is essential for both patentees seeking adequate redress and for alleged infringers assessing potential liability.

It's also worth noting that patent infringement damages are distinct from other monetary claims that might arise in intellectual property disputes, such as claims for unjust enrichment (which could be relevant if the infringer's negligence, a typical requirement for tort damages, cannot be proven) or claims for compensation for the use of an invention after its application has been published but before the patent is granted (governed by Article 65 of the Patent Act).

The Prerequisite of Negligence and Its Presumption (Article 103)

Patent infringement is a tort, and as such, liability for damages under Civil Code Article 709 generally requires a finding of intent (故意 - koi) or negligence (過失 - kashitsu) on the part of the infringer. However, Article 103 of the Patent Act creates a powerful presumption: "An infringer shall be presumed to have been negligent with regard to the act of infringement of a patent right or an exclusive license."

Effect of the Presumption: This shifts the burden to the alleged infringer to prove that they were not negligent – a notoriously difficult task in patent cases. The rationale is that patents are publicly registered and published in the official patent gazette, making their existence and content ascertainable. Therefore, those operating in a technical field are expected to take due care to avoid infringing existing patent rights.

Rebutting the Presumption: In practice, rebutting this presumption is rare. Courts have held that merely consulting with a patent attorney who advised non-infringement, or even relying on a first-instance court judgment of non-infringement (if later overturned on appeal), may not be sufficient to absolve the infringer of negligence. (See, e.g., Osaka District Court, October 30, 1984, Hanrei Times No. 543, p. 263; Tokyo High Court, January 27, 1994, Hanrei Kōgyō Shoyūkenhō (Niki-han) p. 5469-49).

This robust presumption applies not only to literal infringement but also to infringement found under the doctrine of equivalents and to acts of indirect infringement.

Calculating Damages: The Framework of Article 102

Article 102 of the Patent Act provides patentees (or exclusive licensees) with several distinct bases for calculating or presuming the amount of damages suffered due to infringement. The patentee can typically choose the method that is most advantageous or, in some cases, combine aspects of different methods.

1. Presumption of Patentee's Lost Profits (Article 102(1))

This provision aims to compensate the patentee for profits they lost as a direct result of the infringer's sales. The 2019 amendments to the Patent Act refined this section, which now effectively comprises two main components for calculation.

a. Lost Profits Based on Infringer's Sales Volume (Article 102(1)(i))

This is often the primary method for calculating lost profits. The formula is essentially:

(Number of infringing articles assigned by the infringer) × (Profit per unit of the patentee's own articles that the patentee would have sold if there had been no infringement)

However, this amount is capped by the patentee's capacity to have made those sales.

Key Elements and Interpretations:

• Patentee's Competing Product: The patentee must typically be selling products that compete with the infringing articles. The prevailing view is that the patentee's product does not necessarily have to be an embodiment of the patented invention itself, as long as it is a product whose sales were diverted by the infringer's activities (Tokyo High Court, June 15, 1999, Hanrei Jihō No. 1697, p. 96, the "Heat Storage Material Manufacturing Method" case or 「蓄熱材の製造方法」事件).
• "Profit per unit" (単位数量当たりの利益の額 - tan'i sūryō atari no rieki no gaku): This is generally interpreted as the marginal profit (限界利益 - genkai rieki) per unit for the patentee. This means the patentee's revenue per unit less the variable costs that would have been incurred in producing and selling those additional units. Fixed costs (such as rent, depreciation on existing equipment, and general administrative expenses that would not have increased with the additional sales) are typically not deducted. The rationale is that these fixed costs would have been incurred anyway, and the infringement deprived the patentee of revenue that would have contributed to covering these fixed costs and generating profit.
• Infringer's Sales Volume: The number of infringing articles "assigned" (譲渡した物の数量 - jōto shita mono no sūryō) by the infringer forms the multiplier. "Assignment" includes sales and other transfers of ownership.
• Patentee's Sales Capacity (実施の能力 - jisshi no nōryoku): The presumed lost profit is limited to the extent of the patentee's ability to have manufactured and sold the quantity of articles corresponding to the infringer's sales. If the patentee could not have met that demand, this portion of the calculation is capped.

Rebuttal by the Infringer (Proviso to Article 102(1)(i)):

The infringer can reduce the presumed amount of lost profits by proving the existence of circumstances that would have prevented the patentee from making some or all of those sales, even if the infringement had not occurred. Such circumstances might include:

• The presence of other non-infringing competing products in the market.
• The infringer's superior marketing capabilities, business reputation, or brand strength.
• Differences in product features, quality, or price that would have led customers to choose the infringer's product for reasons unrelated to the patented invention.
• The patentee's own limited market reach or distribution channels.

If the infringer successfully demonstrates such circumstances, the court may reduce the amount of lost profits attributed to the infringer's sales. Courts may also make partial rebuttals, and any portion of sales where the causal link remains unascertainable after the infringer's rebuttal attempt often remains to the infringer's disadvantage.

b. Reasonable Royalty for Unaccounted-for Quantities (Article 102(1)(ii) - Introduced by 2019 Amendments)

For any quantity of infringing articles that:

• Exceeds the patentee's sales capacity (as determined under Art. 102(1)(i)), or
• Represents sales for which the presumption of lost sales under Art. 102(1)(i) has been successfully rebutted by the infringer,

the patentee can still claim damages based on an amount equivalent to a reasonable royalty for those quantities. This ensures that even if direct lost sales cannot be fully established for every infringing unit, the patentee is compensated at a royalty level for the unauthorized use. The proviso to this paragraph – "(excluding cases where the patentee or exclusive licensee is found to have been unable to grant a license for the working of their patented invention)" – likely addresses situations involving multiple right holders (e.g., patentee and exclusive licensee) to prevent double recovery for the same infringing acts by ensuring that the party claiming the royalty was actually in a position to license.

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

This provision allows the patentee to claim the profits that the infringer gained through the act of infringement, with such profits being presumed to be the amount of damage suffered by the patentee.

Key Elements and Interpretations:

• Requirement of Patentee's Working (or Potential to Suffer Loss): Historically, some courts required the patentee to be working the invention or at least selling a competing product for this presumption to apply, on the basis that it was a proxy for the patentee's lost profits. However, the IP High Court Grand Panel decision of February 1, 2013 (Hanrei Jihō No. 2179, p. 36, the "Disposable Diaper Disposal Device" case or 「ごみ貯蔵機器」事件) clarified that the patentee does not strictly need to be working the patented invention in Japan. It is sufficient if circumstances exist where the patentee "would have been able to gain profits if the act of infringement by the infringer had not occurred." This could include situations where the infringement frustrated the patentee's plans to enter the market or impacted sales of their competing products (even if those products were not embodiments of the patent in suit, or were primarily sold in other markets with a demonstrable link to the Japanese market potential).
• Calculating Infringer's "Profits" (利益の額 - rieki no gaku): The focus is on the infringer's profits directly attributable to the infringing articles. This typically involves deducting the direct costs incurred by the infringer in producing and selling the infringing goods from the revenue generated by those sales (i.e., the infringer's marginal profit). The IP High Court Grand Panel decision of June 7, 2019 (Reiwa 1 (Ne) 10063, the "Carbon Dioxide-Containing Viscous Composition" case or 「二酸化炭素含有粘性組成物」事件) definitively affirmed that the calculation should be based on the infringer's actual cost structure (infringer-side marginal profit), rather than trying to impute the patentee's cost structure onto the infringer.
• Rebuttal by the Infringer: The infringer can rebut the presumption that their entire profit constitutes the patentee's damage. They can do so by demonstrating, for example, that:
  • The patentee would not have made such profits due to their own business limitations or market conditions.
  • The infringer's profits were attributable to factors other than the patented invention (e.g., their own brand value, additional non-patented features, superior marketing).
  • The market included other non-infringing alternatives.
    The Carbon Dioxide-Containing Viscous Composition Grand Panel case confirmed that principles of rebuttal similar to those under Article 102(1) apply here, allowing for apportionment of profits if only part of the profit is causally linked to the infringement.

3. Reasonable Royalty (Article 102(3))

This is often considered the baseline measure of damages. It allows the patentee to claim "an amount of money that the patentee ... would have been entitled to receive for the working of the patented invention" – essentially, a reasonable royalty.

Key Elements and Interpretations:

• A Floor for Damages: This option is available even if the patentee cannot prove specific lost profits under Article 102(1) (e.g., if the patentee does not practice the invention and has no competing product) or if the infringer made no profits (making Article 102(2) ineffective).
• Relationship with Rebutted Portions of Art. 102(1) and (2):
  • It has long been established that if a portion of the damages presumed under Article 102(1) or (2) is successfully rebutted by the infringer, the patentee can still claim a reasonable royalty under Article 102(3) for that rebutted portion of infringing sales.
  • The 2019 amendment creating Article 102(1)(ii) explicitly codified this "fallback" to a royalty calculation for quantities not covered by proven lost profits under the Article 102(1) framework. While Article 102(2) was not similarly amended, the principle that a reasonable royalty can be claimed for infringing acts not otherwise compensated by proven lost profits remains robust.
• Calculating "Reasonable Royalty" (受けるべき金銭の額 - ukeru beki kinsen no gaku):
  • The term "reasonable royalty" is not meant to be strictly limited to standard industry rates or rates from comparable licenses, although such evidence can be a starting point.
  • A 1998 amendment removed the word "normally" (通常 - tsūjō) from the phrase "amount the patentee would normally receive," signaling that courts should determine the royalty on a case-by-case basis, considering the specific value of the patented invention and the circumstances of the infringement.
  • Factors considered can include: any established royalty rates for the patent in question, royalty rates for comparable patents or technologies, the profitability of the invention, the commercial relationship between the parties, the nature and extent of the infringement, and the contribution of the patented invention to the infringer's product or profits.
  • "Infringement Premium" (2019 Amendment - now Article 102(4)): The 2019 amendments introduced a provision (now Article 102(4), though the PDF's numbering for this specific subsection may be from before this was renumbered from an earlier version of 102(4) which dealt with minor negligence) clarifying that when calculating a reasonable royalty under Article 102(3), the court can consider the amount that would have been agreed upon between the patentee and the infringer on the premise that the act of infringement had occurred. This explicitly allows the court to set a royalty rate that is higher than what might have been negotiated in an amicable, arm's-length licensing discussion before any infringement took place. It acknowledges that the infringer is a wrongdoer, and the hypothetical negotiation is for a license to cover past (and potentially future) infringing acts.

4. Discretionary Reduction for Minor Negligence (Formerly Article 102(4), now often cited as Article 102(5) due to renumbering after 2019 amendments)

The Patent Act provides that if the infringer acted without intent or gross negligence, the court has the discretion to take this into account when calculating damages under Article 102(1) or (2). However, any such reduction cannot result in an award less than the reasonable royalty amount determinable under Article 102(3). This provision acknowledges that patent boundaries can sometimes be unclear, and an infringer might have acted with only slight carelessness, warranting some mitigation of damages above the royalty floor.

Special Issues in Damage Calculation

Several recurring issues complicate the calculation of damages:

1. Patented Invention is Only Part of a Larger Infringing Product (Apportionment / 寄与率 - kiyoritsu)

When the patented feature is just one component or aspect of a larger, multi-component infringing product, the question of apportionment arises.

• For Article 102(1) (Patentee's Lost Profits): The issue is the extent to which the patentee's lost sales of their (often multi-component) product are attributable to the infringement of the patented feature within the infringer's product. Courts have historically considered the "contribution rate" (寄与率 - kiyoritsu) of the patented invention to the overall value or customer appeal of the infringing product. However, the modern trend, especially for Art. 102(1), is to view this less as a direct calculation of a contribution rate by the patentee and more as part of the infringer's rebuttal under the proviso – i.e., the infringer argues that sales were due to other features, thus rebutting the presumed link between their total sales and the patentee's lost profits on their competing product.
• For Article 102(2) (Infringer's Profits): Similarly, if the infringer's profits are derived from a multi-component product, those profits may need to be apportioned to reflect the value contributed by the patented feature versus other features, brand value, etc. The Carbon Dioxide-Containing Viscous Composition Grand Panel case (IP High Court, June 7, 2019) indicated that such apportionment falls within the scope of the infringer's rebuttal.
• For Article 102(3) (Reasonable Royalty): Apportionment can be addressed by adjusting the royalty base (e.g., applying the royalty rate only to the value of the patented component if identifiable, or to a portion of the entire product's value reflecting the invention's contribution) or by adjusting the royalty rate itself.

2. Multiple Rights Holders (e.g., Co-owners, Patentee and Exclusive Licensee)

When the infringed patent is co-owned or subject to an exclusive license, rules are needed to allocate damage awards and prevent double recovery from the infringer.

• Co-ownership: Each co-owner can generally sue for their respective share of damages. For lost profits under Art. 102(1) or (2), the award is often apportioned based on each co-owner's actual or potential contribution to working the invention and their respective lost sales, not necessarily just by their formal percentage of ownership. If no co-owner is working the invention, a reasonable royalty under Art. 102(3) might be divided according to ownership shares.
• Patentee and Exclusive Licensee (専用実施権者 - sen'yō jisshikensha): Typically, the exclusive licensee, as the party primarily exploiting the patent, can claim lost profits under Art. 102(1) or the infringer's profits under Art. 102(2) (these would be net of any royalties the licensee would have owed to the patentee). The patentee might then have a claim for lost royalty income from the licensee if the infringement reduced the licensee's sales. To avoid double recovery for a reasonable royalty under Art. 102(3), courts often hold that only one party (usually the exclusive licensee if they are actively working the invention) can claim the full Art. 102(3) amount from the infringer. The other party (e.g., the patentee) might then have contractual claims against the party who recovered the royalty.
• Patentee and Non-Exclusive Licensee (通常実施権者 - tsūjō jisshikensha): A simple non-exclusive licensee traditionally had difficulty proving direct damages from infringement, as their right is not exclusive. However, a de facto exclusive non-exclusive licensee (独占的通常実施権者 - dokusenteki tsūjō jisshikensha) might be treated more akin to an exclusive licensee for damages purposes in some court decisions.

3. Multiple Infringers in a Chain of Distribution

If infringing products pass through multiple hands (e.g., manufacturer, distributor, retailer), questions arise about liability at each stage.

• Joint Tortfeasors: If multiple parties act in a common enterprise to infringe (e.g., a manufacturer and its captive sales arm), they are typically jointly and severally liable for the total damage caused by their collective actions.
• Sequential Infringers:
  • Lost Profits (Art. 102(1)): The patentee generally experiences one overall quantum of lost sales due to the infringing products entering the market. While each infringer in the chain is a tortfeasor, recovery of damages for a specific lost sale from one infringer usually precludes recovering for that same lost sale from another infringer in the chain (though they might be jointly and severally liable for that specific quantum of loss until it is satisfied).
  • Infringer's Profits (Art. 102(2)): Each infringer in the chain (manufacturer, wholesaler, retailer) earns their own distinct profit. The patentee may, in principle, be able to claim the respective profits made by each infringer at their stage of distribution, as these are different pools of profit. However, courts are careful to ensure that the aggregate recovery under this head does not lead to an unjust windfall that grossly exceeds the patentee's actual probable loss, especially if these profits are being used as a proxy for the patentee's lost sales.
  • Reasonable Royalty (Art. 102(3)): The patentee is entitled to what amounts to one reasonable royalty for the infringing trajectory of a given product through the market. Payment of a full reasonable royalty by one infringer in the distribution chain for a specific set of goods typically satisfies the royalty claim for those same goods against other infringers further down the chain (they would be jointly and severally liable for that royalty amount until satisfied).

Conclusion

Article 102 of the Japanese Patent Act provides a sophisticated and evolving framework for the calculation of damages in patent infringement cases. It aims to ensure that patentees are fairly compensated for the unauthorized use of their inventions by offering several methods for presuming or calculating losses, including lost profits, infringer's profits, and a reasonable royalty. The provisions regarding rebuttal of presumptions, apportionment for multi-component products, and the impact of multiple right-holders or infringers add layers of complexity that require careful legal and factual analysis. Recent amendments, particularly those from 2019 concerning the calculation of royalties in an infringement context and the interplay between different subsections of Article 102, continue to refine this area of law, striving for a balance between effective remedies for patentees and predictability for all parties involved in the innovation ecosystem.