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Tuesday, 21 August 2007

UK consultation on IP damages - an ACID response

The UK Ministry of Justice (formerly the Department of Constitutional Affairs) asked for comments on its Consultation Paper on Damages, questions 35 and 36:

"Do you agree that in the Copyright, Design and Patents Act 1988 and the Patents Act 1977 the term ‘additional damages’ should be replaced by ‘aggravated and restitutionary damages’?

“What are your views on how the system of damages works in relation to (a) patents;(b) designs(c) trade marks and passing off (d) copyright and related rights?".
In response ACID (Anti Copying In Design) has issued a full submission in which it made the following points:

"... Damages under the existing legal structure are woefully inadequate and serve no purpose in dissuading those who seek criminal gain from what is still considered a “soft crime” by continuing to make vast profits from the immoral, anti-commercial and criminal activities which they continue to pursue. Current estimates about the escalating cost of IP crime and its devastating effects on IP rights holders would be significantly improved if there was a capability within the Court system to use aggravated and restitutionary damages as a compelling deterrent in fighting what has become a serious threat to the UK’s intellectual capital, its intellectual know-how and resultant IP rights. ...
Aggravated Damages

The mental distress and moral outrage of IP theft must be seen to be quantified and demonstrated by the award of aggravated damages – often it takes a tremendous amount of conviction, courage and huge financial cost to take action causing ensuing mental distress. An example, out of many (there have been 220 settlements on behalf of ACID members), is an ACID member (SME) who took action against a well-known major high street retailer. After two years battling against powerful legal stonewalling and unnecessary perpetuation of litigation funded by deep legal pockets, he was, at the last moment before Court was the only option, able to settle by mediation. The defendant’s lawyers had used every possible argument to prolong the proceedings. The debilitating effect on his family, his business and himself was enormous, it is doubtful whether he will fully recover from this and now has a very jaundiced view of ever attempting to address IP issues through the legal system. The existence of aggravated damages should most definitely be considered in any reform of the damages system in this country to act as a real and meaningful deterrent against IP theft and used to support designers and creative thinkers to continue and encourage innovation and original thought. Fiscal limitations for many of the UK’s SME’s limits access to the legal system to redress IP infringement but significant aggravated damages would contribute as a real deterrent factor.

Restitutionary damages

Under an assessment of damages, a rights owner can only recover the profit that it would have made on sales of their original articles if they can show that each sale made by the infringer would have been a sale made by the rights owner. Where the selling price of the infringing article is significantly lower than the original, which is almost always the case given that the infringer bears no design, development or promotional costs, it is not possible for the rights owner to recover their lost profit on those sales. Instead, their remedy is limited to a reasonable royalty on each sale made by the infringer based on the unrealistic assumption that the rights owner would have entered into a licence with the infringer had the infringer approached the rights owner for permission to copy in the first place. Accordingly, under an assessment of damages, there is no reason whatsoever for an infringer to approach a rights owner for a licence in advance of its infringing activities when the only sanction which may be made against it should its infringing activities be discovered and pursued by the rights owner would be payment of what they would have to have paid anyway had they approached the rights owner upfront.

It is for this reason that the current system of damages under civil law provides no disincentive whatsoever to copiers and is a significant contributor to the extent of the copying problem currently being experienced.

Exemplary Damages

Punishing the wrong doer in a fair and just society rarely happens in IP infringement. IP crime is still not considered as “theft” nor is it promoted as “theft” clearly because of economic concerns and a lack of education and awareness by the consumer that they are doing anything wrong when they buy counterfeit, pirated or copied goods. In the case of copied goods many are completely unaware that, for example, a supposed reputable brand name has used the designs of an originator without permission, deliberately sent them to China to be produced at a fraction of the original cost and re-introduced them under their own name. The originator (if they are a design right holder) is rarely able to seek legal redress because the law of passing off does not provide an adequate legal remedy as usually they are unknown small brands, the retailer has changed the design sufficiently so that it is difficult to legally challenge, and it is almost impossible to provide evidence of consumer confusion. Risk analysis ensures that this strategy makes economic sense for a retailer or manufacturer but possibly they may review this strategic approach if sufficient exemplary damages were introduced to challenge their financial risk analysis.

Clearly, one of the main disincentives to a copier or dealer in copies of pirated goods is the potential remedies available against them should action be brought. For design right holders, there are currently no criminal sanctions available* see note 1. Furthermore, the current potential civil remedy against an infringer of an intellectual property right is either an assessment of the profit made by the infringer or an award of damages representing the lost profit suffered by the originator.

Under an account of profits, the infringer is only required to account for the profit that they have made in dealing with the infringing articles. The infringer is entitled to deduct all their expenses and overheads involved in those infringing activities. Consequently, there is no loss suffered by the infringer as a result of the infringing activities, and therefore no deterrent whatsoever against future infringing activities. It should also be noted that only a very small percentage of copies are ever pursued through the courts, so on most occasions, the infringer gets away with all their profit.

The European Enforcement Directive dealt with this problem in Article 13. In particular, Article 13.2(b) proposes an award of compensatory damages corresponding to the actual prejudice (including lost profits) suffered by the rights holder as a result of the infringement. This clearly takes into account the possibility of not only damages designed to compensate the loss suffered by the rights owner but includes the element of lost profit often missing under the current UK law and also damages representing other elements including in particular moral prejudice. The design industry is a creative industry and all too often ACID hears of the emotional damage suffered by a designer when their designs are copied. This can have an extremely detrimental effect on their future ability and willingness to create new designs. Implementing the provisions of Article 13 have gone some way but not nearly far enough towards remedying the situation...."
The IPKat considers ACID to be a valuable barometer. measuring the pressures faced by small IP owners and the extent to which the law can assist and protect them. Cases involving ACID members won't generally be the big ones that hit the headlines and get reported in the law reports; nor will its members' disputes usually be the sort of affair in which IP monopoly interests are pitched against economic issues such as the need to ensure the free movement of goods and to preserve a level of competition for the good of consumers - but this is precisely why ACID's perception that existing levels of damages are inadequate is so important for the government to take into account.

Right: Bring a smile to the face of a distressed gentle-cat by lobbying for damages for this creative kitty's injured feelings (illustration by CatWarp)

Merpel says, I'd guess that responses to these questions are likely to be quite one-sided: not many people are likely to take the time and effort to write in and say "we think the present level of damages is fine" - unless a British Association of Infringing Users has recently been formed.

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