Damages in EU’s Directive on the Civil Enforcement of Intellectual Property Rights and in Sweden

Civil damages awards are one of the principal remedies for infringements of intellectual property rights. Damages serve both as compensation to the rights holder for the economic detriment that results from an infringement, and as a specific and general deterrent to infringers. In implementing the EU’s Directive on the Civil Enforcement of Intellectual Property Rights (“IPRED”), Member States provide compensation for various types of detriment suffered by the rights holder, which include lost sales and consequential damage (such as to the value of the brand). Member States also allow the rights holder to recover various costs of investigating, taking legal action against, and rectifying the infringement. Such compensation is not uniformly available for all relevant types of damage and costs, however.

Moreover, various difficulties of proof, the unwillingness of some courts to recompense the rights holder’s damage or costs in full, and other particular practices can also leave some of the economic benefit of the infringement with the infringer, or leave some of the cost of its redress on the rights holder. Rather than serving as a deterrent to infringement, such results actually provide an economic incentive to engage in infringement.

The Purpose of Damages and Costs Awards

As we all area aware, as a general principle, damages for IPR infringements are intended to accomplish two ends:

• compensation: damage awards should put the right holder in the position he or she would have been had the infringement not taken place;

• deterrence: damage awards should serve to discourage both repeat and would-be infringers.

The requirement that damage awards for IPR infringements both compensate and deter is firmly established in European law. The IPRED requires that Member States “ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the right holder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement” (Art. 13). Right holders are also entitled to have their legal costs and other expenses remunerated by the infringer unless equity dictates otherwise (Art. 14). At the same time, the IPRED also requires that damage awards – as with all enforcement measures – be “effective” and “dissuasive” (Art. 3).

Shortcomings in Damages and Costs Awards

A comprehensive review of the law and practice in the EU Member States shows that although elements of the civil damages and costs awards mechanisms work well in some Member States and would be useful best practices models, national IPR damages regimes often do not effectively achieve the twin objectives of compensation and deterrence. Key findings in the Legal Sub-Group’s work this regard include the following:

• Courts face difficulty in calculating and awarding compensation comprehensively.

Consistent with IPRED Article 13, almost all countries surveyed consider the rightholder’s lost profits in awarding damages. These usually are defined as the profits that would have been made by the rightholder in the absence of the infringement.

However, it is extremely difficult to prove lost profits at all in IPR cases in at least one country (Greece), and courts in many other Member States find it difficult as a practical matter to assess lost profits accurately. Courts in some Member States, for example, discount the lost profits of the rightholder on the basis of net-profit measurements, i.e. costs saved (Belgium), or of potentially different (Slovenia) or nonsubstitutionary (Sweden) sales or profits made by the infringers.

Faced with these types of challenges, many national courts opt for awarding the rightholder “lump sum” damages in some cases (e.g. Denmark, Greece, Netherlands), as foreseen by the IPRED. Some appear to make a lump-sum calculation designed to approximate lost profits (e.g. Luxembourg) or “moral” damages (e.g. Belgium). Awards may be based on the relevant licence fee, “reasonable” royalty or “equitable remuneration” – which can be the full price of a licence or product, but may also be a lower amount, such as “estimated” or “hypothetical royalties”.

• Outside of lost profits, rightholders may not in practical terms be compensated for other negative economic consequences resulting from an infringement.

Despite the IPRED’s instruction (Art. 13) that judicial authorities consider all appropriate aspects, including various “negative economic consequences” and “infringer profits”, in awarding damages for IPR infringements, in practice several such factors may never be considered. There are many types of consequential damage that can result from an infringement – reputational damage, price declines, damage to the distinctiveness or value of a trademark, and the like – which are rarely taken into account or compensated (e.g. courts in Finland, Hungary, Poland and Greece do not consider these important factors). The infringers’ profits are taken into account in many countries, but may only be allowed as an alternative to compensatory damages (e.g. UK).

• Damages for non-economic harm are often unavailable.

As a general rule, moral damages are rarely awarded for IPR infringements or, when awarded, tend to be nominal (e.g. Estonia).

• The costs of investigating, taking legal action against, and rectifying an infringement are often not compensated in full.

In principle, rightholders in all Member States are eligible to recover legal costs and other expenses incurred in bringing successful infringement proceedings. However, many of the actual costs involved can remain on the rightholder. For example, courts may award lawyers’ fees far below the amounts actually spent (e.g. Denmark, Greece, Luxembourg, Spain). Lawyers’ fees are often determined on the basis of statutory tariffs with fixed maximums; in most markets, these tariffs in practice can be far lower than the actual legal costs incurred by rightholders (e.g. Czech, Germany, Italy, Poland, Romania). At the same time, while fees relating to court appointed experts generally can be recovered in their entirety, costs of private experts may not be similarly compensated in full (e.g. Romania). The costs of storage and destruction of seized goods are sometimes placed on the rightholder. As a result, even in those instances where rightholders recover the full amount of their actual damages, incomplete costs awards nonetheless leave them worse off after infringement proceedings than before.

• Infringers may retain some of their profits, or otherwise have an economic incentive to engage in infringement.

For example, in some Member States damages awards may be reduced or eliminated where an infringer acquires a license post infringement (e.g. UK). Moreover, some damages systems refuse to relieve infringers of some of their profits or other economic benefits of infringement, such as by letting the infringer in some cases keep the part of a licence fee or distribution profit that a legitimate purchaser would have had to pay to the legitimate distribution channel (UK). Far from being a deterrent to infringement, such rules encourage infringers to take the risk of infringement, with little greater “downside” than the normal licence fee even if the infringement is detected and proven. In sum, these various challenges appear in many cases to have led to low damages and costs awards that are inconsistent with the scope of the infringements involved, the IPRED’s anticipated allocation of economic risks and benefits between rightholder and infringer, and the actual costs of redress. In a number of Member States, the current provisions and practices on damages not only fail to compensate rightholders and relieve infringers of their gains, but in fact may provide financial incentives for counterfeiting and piracy.

Conclusion re IPRED

Damages awards are not currently effective enough in order to dissuade potential infringers from engaging in illegal activities. This is particularly so where damages awarded by the courts fail to match the level of profit made by the infringers.

The main aim of awarding damages is to place the rightholders in the same situation as they would have been in, in the absence of the infringement. Nowadays, however, infringers’ profits (unjust enrichment) often appear to be substantially higher than the actual damage incurred by the rightholder. In such cases, it could be considered whether the courts should have the power to grant damages commensurate with the infringer’s unjust enrichment, even if they exceed the actual damage incurred by the right holder. Such procedure is applicable in Sweden where the infringer’s profit may form the basis for estimation of the right holder’s damage.

Equally, there could be a case for making greater use of the possibility to award damages for other economic consequences and moral damages. It must therefore be made clear that reasonable compensation/royalty for the use of an intellectual property right should be awarded as a complement to compensation for damages (in particular lost profits) and not as an alternative. Such clarification would increase damage amounts and its dissuasive effects.

In cases where the infringer is a legal person and the rightholder fails to obtain damages because the infringer has no assets, has been liquidated or is in any other way insolvent, an assessment could be made as to whether the rightholder is able to claim damages from the company’s managing director(s) under national law, and if so under what conditions. Such procedure is applicable in Sweden where a negligent act of infringement by a company representative may result in responsibility for damage claims for this physical person(s).

PART 2

SWEDEN Summary

1. Legal basis for compensation

According to Section 38 in the Swedish Trademarks Act (1960:644) the infringer shall, if the infringement is considered wilful or negligent, (i) pay reasonable compensation for the use of the trademark and (ii) pay compensation for the further damage caused by the infringement. If the infringement is considered unintentional, the infringer shall pay compensation only if and to the extent as found reasonable.

2. Assessment of damage suffered

In Sweden assessment of damages for the violation of trademark rights is based on a mix between the grounds of violation of property proprietorship and civil liability. On one hand, the trademark proprietor is entitled to monetary remedy in an amount corresponding to a reasonable compensation for the use of the trademark. On the other hand, general principles of tort law apply for compensation for further damage.

One common way to calculate the reasonable compensation for the use of the trademark is to base it on the royalty that the trademark proprietor normally applies in his business or the corresponding level of royalty used in similar business, alternatively, an assumed royalty should the trademark proprietor have agreed to license his trademark to the infringer.

Further damage includes lost sales, price erosion, internal costs and losses, goodwill damage, costs for marketing etc. Such a claim is in most cases a complicated task to complete. The possible compensation for further damage, in addition to the compensation for use of the trademark, shall not result in an over-compensation for the trademark proprietor.

3. Award of the unfair profits made by the Defendant

According to the preparatory works of the Swedish Trademarks Act, the court may consider the sales and profit made by the infringer. It does though largely depend on the circumstances in the case and in particular on the parties’ argumentation in the case.

In case the damage is calculated on the infringers’ profit, the profit can be defined as the profit the infringer would have obtained if he had sold the products at the price corresponding to the price of the original products, at least as concerns counterfeit products. This alternative calculation can many times render a higher damage since the infringing products many times are manufactured at lower cost than the original products.

4. Commercialisation

Whether or not the trademark proprietor commercialises the trademark does not affect its right to claim compensation. However such factors as investments by the trademark proprietor and the extent of it in order to make the trademark known may support that the trademark is a valuable trademark and information about the investments can be used as evidence to support the claim for further damages, especially with regards to the goodwill damages suffered.

5. Knowledge of the infringement

Monetary remedy for violation of trademark rights in an amount corresponding to reasonable compensation for the use of the trademark is available in circumstances where the violation was committed negligently or intentionally. In the event a violation has taken place but was committed unintentionally, monetary remedy is still available if and to the extent that this is considered reasonable. It shall be noted that if the infringement case concerns a registered trademark, the courts always considers the infringement to be at least negligent.

A monetary compensation should be provided to the trademark proprietor with a higher sum in cases of intentional violation of trademark rights than in cases of negligent violations. Thus, by defining counterfeiting and piracy of trademarks as intentional violations of the trademark rights these forms of violation should have an impact on the monetary compensation when compared to negligent infringement of trademark rights, but not when compared to intentional infringements. In the preparatory work it is also stated that the period the infringement has taken place and the degree of guilt of the infringer’s side should have an impact on the amount of damages. The aim is however that the owner of the right should have full compensation for its loss, not more.

6. Award of costs incurred by the Claimant

According the fundamental rule of the Swedish Code of Judicial Procedure (Chapter 18 Section 1) the loosing party shall compensate the winning party’s costs and expenses in the concerned infringement proceedings. Deviation from this may follow of other sections in the Code of Judicial Procedure, but there is no special exception for infringements and there is no exception mentioned in the Swedish Trademarks Act.

7. Punitive damages

Compensation similar to the punitive damages applied in some jurisdictions is not applied in Sweden. However in certain cases reasonable remuneration for the use of the trademark may exceed the actual damages suffered and can therefore be regarded as a kind of punitive damage to compensate the trademark proprietor in general for the infringement occurred.

8. Criminal sanctions

According to Section 37 in the Swedish Trademarks Act, an infringer in cases of intentional or gross negligent infringements can be sentenced to a fine or up to two years of imprisonment. According to the same Section, preparation for and attempted infringements of such kind may also be punished according to Chapter 23 of the Swedish Penal Code (1962:700).

However, a claimant must file a criminal complaint and the Swedish Prosecutors Office must also consider prosecution of the infringement to be of public interest, for there to be a criminal case. This is quite uncommon.

9. Compensation “ex aequo et bono” (“according to what is right and good”)

According to general rules of evidence, the trademark proprietor has to prove the scope of damages incurred. Swedish Code of Judicial Procedure (Chapter 35, Section 5) provides that the court may estimate the damage to a reasonable amount if full evidence cannot be presented at all, or only with difficultly, or if the evidence can be assumed to entail costs or inconvenience not being in a reasonable proportion to the size of the damage and the claim concerns only a lesser amount.

Civil damages awards are one of the principal remedies for infringements of intellectual property rights. Damages serve both as compensation to the rights holder for the economic detriment that results from an infringement, and as a specific and general deterrent to infringers. In implementing the EU’s Directive on the Civil Enforcement of Intellectual Property Rights (“IPRED”), Member States provide compensation for various types of detriment suffered by the rights holder, which include lost sales and consequential damage (such as to the value of the brand). Member States also allow the rights holder to recover various costs of investigating, taking legal action against, and rectifying the infringement. Such compensation is not uniformly available for all relevant types of damage and costs, however.

Moreover, various difficulties of proof, the unwillingness of some courts to recompense the rights holder’s damage or costs in full, and other particular practices can also leave some of the economic benefit of the infringement with the infringer, or leave some of the cost of its redress on the rights holder. Rather than serving as a deterrent to infringement, such results actually provide an economic incentive to engage in infringement.

The Purpose of Damages and Costs Awards

As we all area aware, as a general principle, damages for IPR infringements are intended to accomplish two ends:

• compensation: damage awards should put the right holder in the position he or she would have been had the infringement not taken place;

• deterrence: damage awards should serve to discourage both repeat and would-be infringers.

The requirement that damage awards for IPR infringements both compensate and deter is firmly established in European law. The IPRED requires that Member States “ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the right holder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement” (Art. 13). Right holders are also entitled to have their legal costs and other expenses remunerated by the infringer unless equity dictates otherwise (Art. 14). At the same time, the IPRED also requires that damage awards – as with all enforcement measures – be “effective” and “dissuasive” (Art. 3).

Shortcomings in Damages and Costs Awards

A comprehensive review of the law and practice in the EU Member States shows that although elements of the civil damages and costs awards mechanisms work well in some Member States and would be useful best practices models, national IPR damages regimes often do not effectively achieve the twin objectives of compensation and deterrence. Key findings in the Legal Sub-Group’s work this regard include the following:

• Courts face difficulty in calculating and awarding compensation comprehensively.

Consistent with IPRED Article 13, almost all countries surveyed consider the rightholder’s lost profits in awarding damages. These usually are defined as the profits that would have been made by the rightholder in the absence of the infringement.

However, it is extremely difficult to prove lost profits at all in IPR cases in at least one country (Greece), and courts in many other Member States find it difficult as a practical matter to assess lost profits accurately. Courts in some Member States, for example, discount the lost profits of the rightholder on the basis of net-profit measurements, i.e. costs saved (Belgium), or of potentially different (Slovenia) or nonsubstitutionary (Sweden) sales or profits made by the infringers.

Faced with these types of challenges, many national courts opt for awarding the rightholder “lump sum” damages in some cases (e.g. Denmark, Greece, Netherlands), as foreseen by the IPRED. Some appear to make a lump-sum calculation designed to approximate lost profits (e.g. Luxembourg) or “moral” damages (e.g. Belgium). Awards may be based on the relevant licence fee, “reasonable” royalty or “equitable remuneration” – which can be the full price of a licence or product, but may also be a lower amount, such as “estimated” or “hypothetical royalties”.

• Outside of lost profits, rightholders may not in practical terms be compensated for other negative economic consequences resulting from an infringement.

Despite the IPRED’s instruction (Art. 13) that judicial authorities consider all appropriate aspects, including various “negative economic consequences” and “infringer profits”, in awarding damages for IPR infringements, in practice several such factors may never be considered. There are many types of consequential damage that can result from an infringement – reputational damage, price declines, damage to the distinctiveness or value of a trademark, and the like – which are rarely taken into account or compensated (e.g. courts in Finland, Hungary, Poland and Greece do not consider these important factors). The infringers’ profits are taken into account in many countries, but may only be allowed as an alternative to compensatory damages (e.g. UK).

• Damages for non-economic harm are often unavailable.

As a general rule, moral damages are rarely awarded for IPR infringements or, when awarded, tend to be nominal (e.g. Estonia).

• The costs of investigating, taking legal action against, and rectifying an infringement are often not compensated in full.

In principle, rightholders in all Member States are eligible to recover legal costs and other expenses incurred in bringing successful infringement proceedings. However, many of the actual costs involved can remain on the rightholder. For example, courts may award lawyers’ fees far below the amounts actually spent (e.g. Denmark, Greece, Luxembourg, Spain). Lawyers’ fees are often determined on the basis of statutory tariffs with fixed maximums; in most markets, these tariffs in practice can be far lower than the actual legal costs incurred by rightholders (e.g. Czech, Germany, Italy, Poland, Romania). At the same time, while fees relating to court appointed experts generally can be recovered in their entirety, costs of private experts may not be similarly compensated in full (e.g. Romania). The costs of storage and destruction of seized goods are sometimes placed on the rightholder. As a result, even in those instances where rightholders recover the full amount of their actual damages, incomplete costs awards nonetheless leave them worse off after infringement proceedings than before.

• Infringers may retain some of their profits, or otherwise have an economic incentive to engage in infringement.

For example, in some Member States damages awards may be reduced or eliminated where an infringer acquires a license post infringement (e.g. UK). Moreover, some damages systems refuse to relieve infringers of some of their profits or other economic benefits of infringement, such as by letting the infringer in some cases keep the part of a licence fee or distribution profit that a legitimate purchaser would have had to pay to the legitimate distribution channel (UK). Far from being a deterrent to infringement, such rules encourage infringers to take the risk of infringement, with little greater “downside” than the normal licence fee even if the infringement is detected and proven. In sum, these various challenges appear in many cases to have led to low damages and costs awards that are inconsistent with the scope of the infringements involved, the IPRED’s anticipated allocation of economic risks and benefits between rightholder and infringer, and the actual costs of redress. In a number of Member States, the current provisions and practices on damages not only fail to compensate rightholders and relieve infringers of their gains, but in fact may provide financial incentives for counterfeiting and piracy.

Conclusion re IPRED

Damages awards are not currently effective enough in order to dissuade potential infringers from engaging in illegal activities. This is particularly so where damages awarded by the courts fail to match the level of profit made by the infringers.

The main aim of awarding damages is to place the rightholders in the same situation as they would have been in, in the absence of the infringement. Nowadays, however, infringers’ profits (unjust enrichment) often appear to be substantially higher than the actual damage incurred by the rightholder. In such cases, it could be considered whether the courts should have the power to grant damages commensurate with the infringer’s unjust enrichment, even if they exceed the actual damage incurred by the right holder. Such procedure is applicable in Sweden where the infringer’s profit may form the basis for estimation of the right holder’s damage.

Equally, there could be a case for making greater use of the possibility to award damages for other economic consequences and moral damages. It must therefore be made clear that reasonable compensation/royalty for the use of an intellectual property right should be awarded as a complement to compensation for damages (in particular lost profits) and not as an alternative. Such clarification would increase damage amounts and its dissuasive effects.

In cases where the infringer is a legal person and the rightholder fails to obtain damages because the infringer has no assets, has been liquidated or is in any other way insolvent, an assessment could be made as to whether the rightholder is able to claim damages from the company’s managing director(s) under national law, and if so under what conditions. Such procedure is applicable in Sweden where a negligent act of infringement by a company representative may result in responsibility for damage claims for this physical person(s).

PART 2

SWEDEN Summary

1. Legal basis for compensation

According to Section 38 in the Swedish Trademarks Act (1960:644) the infringer shall, if the infringement is considered wilful or negligent, (i) pay reasonable compensation for the use of the trademark and (ii) pay compensation for the further damage caused by the infringement. If the infringement is considered unintentional, the infringer shall pay compensation only if and to the extent as found reasonable.

2. Assessment of damage suffered

In Sweden assessment of damages for the violation of trademark rights is based on a mix between the grounds of violation of property proprietorship and civil liability. On one hand, the trademark proprietor is entitled to monetary remedy in an amount corresponding to a reasonable compensation for the use of the trademark. On the other hand, general principles of tort law apply for compensation for further damage.

One common way to calculate the reasonable compensation for the use of the trademark is to base it on the royalty that the trademark proprietor normally applies in his business or the corresponding level of royalty used in similar business, alternatively, an assumed royalty should the trademark proprietor have agreed to license his trademark to the infringer.

Further damage includes lost sales, price erosion, internal costs and losses, goodwill damage, costs for marketing etc. Such a claim is in most cases a complicated task to complete. The possible compensation for further damage, in addition to the compensation for use of the trademark, shall not result in an over-compensation for the trademark proprietor.

3. Award of the unfair profits made by the Defendant

According to the preparatory works of the Swedish Trademarks Act, the court may consider the sales and profit made by the infringer. It does though largely depend on the circumstances in the case and in particular on the parties’ argumentation in the case.

In case the damage is calculated on the infringers’ profit, the profit can be defined as the profit the infringer would have obtained if he had sold the products at the price corresponding to the price of the original products, at least as concerns counterfeit products. This alternative calculation can many times render a higher damage since the infringing products many times are manufactured at lower cost than the original products.

4. Commercialisation

Whether or not the trademark proprietor commercialises the trademark does not affect its right to claim compensation. However such factors as investments by the trademark proprietor and the extent of it in order to make the trademark known may support that the trademark is a valuable trademark and information about the investments can be used as evidence to support the claim for further damages, especially with regards to the goodwill damages suffered.

5. Knowledge of the infringement

Monetary remedy for violation of trademark rights in an amount corresponding to reasonable compensation for the use of the trademark is available in circumstances where the violation was committed negligently or intentionally. In the event a violation has taken place but was committed unintentionally, monetary remedy is still available if and to the extent that this is considered reasonable. It shall be noted that if the infringement case concerns a registered trademark, the courts always considers the infringement to be at least negligent.

A monetary compensation should be provided to the trademark proprietor with a higher sum in cases of intentional violation of trademark rights than in cases of negligent violations. Thus, by defining counterfeiting and piracy of trademarks as intentional violations of the trademark rights these forms of violation should have an impact on the monetary compensation when compared to negligent infringement of trademark rights, but not when compared to intentional infringements. In the preparatory work it is also stated that the period the infringement has taken place and the degree of guilt of the infringer’s side should have an impact on the amount of damages. The aim is however that the owner of the right should have full compensation for its loss, not more.

6. Award of costs incurred by the Claimant

According the fundamental rule of the Swedish Code of Judicial Procedure (Chapter 18 Section 1) the loosing party shall compensate the winning party’s costs and expenses in the concerned infringement proceedings. Deviation from this may follow of other sections in the Code of Judicial Procedure, but there is no special exception for infringements and there is no exception mentioned in the Swedish Trademarks Act.

7. Punitive damages

Compensation similar to the punitive damages applied in some jurisdictions is not applied in Sweden. However in certain cases reasonable remuneration for the use of the trademark may exceed the actual damages suffered and can therefore be regarded as a kind of punitive damage to compensate the trademark proprietor in general for the infringement occurred.

8. Criminal sanctions

According to Section 37 in the Swedish Trademarks Act, an infringer in cases of intentional or gross negligent infringements can be sentenced to a fine or up to two years of imprisonment. According to the same Section, preparation for and attempted infringements of such kind may also be punished according to Chapter 23 of the Swedish Penal Code (1962:700).

However, a claimant must file a criminal complaint and the Swedish Prosecutors Office must also consider prosecution of the infringement to be of public interest, for there to be a criminal case. This is quite uncommon.

9. Compensation “ex aequo et bono” (“according to what is right and good”)

According to general rules of evidence, the trademark proprietor has to prove the scope of damages incurred. Swedish Code of Judicial Procedure (Chapter 35, Section 5) provides that the court may estimate the damage to a reasonable amount if full evidence cannot be presented at all, or only with difficultly, or if the evidence can be assumed to entail costs or inconvenience not being in a reasonable proportion to the size of the damage and the claim concerns only a lesser amount.