Swing the axe, glue the tail, spin the coin: damages for patent infringement

Handed down on the Wednesday morning of last week by Mr Justice Norris, the latest episode in the burgeoning saga in Fabio Perini S.P.A. v LPC Group PlC & Paper Converting Machine Company Italia & Others [2012] EWHC 911 (Ch) is an absorbing (or, Merpel asks, should that be absorbent?) read. Unlike the famous brand of toilet roll of which the ends might be sealed by the patented method, the judgment is not that soft: it may or may not be strong, depending on how happy one is with the analysis, but it certainly feels very, very long (although only 171 paragraphs, it contains just over 24,000 words spread over almost 50 pages).  Readers of this weblog will be happy to discover that they don't have to read the judgment from cover to cover to discover what's been happening: there follows an account by the venerable Matt the Kat who, having taken a break from blogging, has been coaxed into taking a brief break from his break in order to pen this blog post on a subject which is so dear to his heart.

Background

First a bit of background for the uninitiated: this judgment comes on the back of an action originally heard by Floyd J in the summer of 2009 at [2009] EWHC 1929. Perini had brought an action against four defendants (LPC, LPC (UK), PCMC and PCMC Italia), alleging infringement of two European Patents (UK) – 0481929 (“929”) and 0699168 (“168”) – for machinery and methods for sealing the tail ends of rolls of paper (such as toilet tissue or kitchen towel), so that they stay rolled up (this is referred to in the most recent judgment as “gluing the tail to the log” – Merpel’s eyes watered at this point). Condensing 182 paragraphs of judgment into a sentence: the judge held 929 valid and infringed by some of the defendants’ actual and proposed activities, but considered the 168 patent to be invalid for obviousness. The Court of Appeal (Neuberger MR, Hughes & Jackson LJJ, at [2010] EWCA Civ 525, upheld Floyd J's decision.

So, back to the story in hand. Usually a trip to the Court of Appeal would have been the end of the matter (at least as far as we, the judgment-consuming masses, are concerned). Floyd J had ordered an inquiry into damages suffered by Perini (or, at its option, an account of profits) in October 2009, based on his findings in the original dispute. One might therefore have expected the parties to slug it out between themselves and reach a settlement. However, as the reader may by now have twigged, this did not happen. Perini duly elected for damages, but there were nevertheless questions concerned with the calculation. Accordingly, almost three years after the original spat first worked its way through the courts, the parties are still at it, arguing over the damages.

The dispute in hand

Jumping into the issues, while there are other things that are dealt with in the early paragraphs of the judgment, the nub of the dispute concerns the assessment of damages, and so it is to this issue that we turn.

Damages – lost profits

Norris J first went back to basics, reminding us all that patent infringement is a tort and that, accordingly, damages are awarded to put the injured party back in the position that he would have been in had the infringement not taken place. Thereafter, issues of causation (and remoteness) were considered before addressing the measurement of the damage occasioned. Paying heed to Lord Shaw’s classic statement in Watson Laidlaw & Co v Pott Cassels & Williamson (1914) 31 RPC 104, at which he noted that “The restoration by way of compensation is therefore accomplished to a large extent by the exercise of sound imagination and the practice of the broad axe”, the judge therefore set to swinging.

Causation

Norris J dealt with a number of issues under this head, most notably asking: “what does Perini generally have to prove to show that LPC’s infringement … caused the loss claimed by Perini?” The defendant had argued that, because the infringement related to the use of a process, this meant that, as a matter of logic, damages could not be recovered in respect of machinery already supplied before the infringing use took place. Norris J rejected this argument:

[59] “…Where the contract [of supply, as here,] expressly requires the infringement to occur, and under the contract the machinery is installed and commissioned and is thereafter put into production using the infringing method, I do not see why a common sense view of causation must necessarily and as a matter of principle exclude the possibility that the promotion of that contract specifying that the use be employed caused Perini to lose a contract employing its patented method which it otherwise would have gained.” [which, Merpel notes, is a long-winded way of saying that the defendant’s promise of a product that will perform a patented method might deprive the owner of that patent from a sale of its own machinery to do the same thing: it's the patent law equivalent of heading them off at the pass].

Noting that assessment of, and compensation for, the loss of chance in such cases was not an exact science, Norris J further warned [at 75] that as the assessment “requires the Court to construct and value hypotheses … one cannot expect much in the way of accuracy.” Having set the parties’ minds at rest in this manner, the judge proceeded to consider the evidence before him and to apply the law to the facts. Accordingly

“[101] …The nature of the tail sealer was one of the factors that caused the agreement [between the defendant (PCMC) and the purchaser of the defendant’s machinery (and thereby the user of the patented process) (LPC)] to be made”

“[102] …LPC chose PCMC’s infringing method over [another that did not infringe], and went to the trouble of making it a contractual term that the infringing method be used.”

However, the real question was not considered to be why PCMC got the contract, but rather whether the “decision of LPC to use an infringing method provided by PCMC and to embody it in the contract caused loss to Perini.” [104]. The burden of establishing that Perini’s loss was caused by the infringement by LPC had, in the judge’s opinion, been discharged by “the fact that the contract upon which LPC and PCMC entered specified the infringing use” [105].

Loss of chance

Moving on to the assessment of the nature of the chance, the judge summarised the problem: was the chance that was lost “a chance to supply a Perini tail sealer or chance to supply a converting line containing a Perini tail sealer”? Norris J considered this variant of the tin whistle on a battleship problem (for those unversed in this particular issue see [108] of the judgment for a quick summary), which he said was a question of remoteness: “what is the extent of the loss for which the defendant ought fairly or justly or reasonably to be held liable?”

Looking at the matter “as one of commercial substance”, the judge considered that the chance that was lost was one of supplying the entire line – the evidence established that this was the general practice in the market. Therefore, even though existing lines could be modified to accept new tail sealers, it was noted at [113] that a potential purchaser with a free hand would be “very unlikely” to go down this road.

Reaching further into the mysteries of probable outcomes, the judge then set himself the task of considering whether Perini would have sold a high specification line or a low specification line to LPC in the event that they had not been supplied by PCMC. Eschewing conventional wisdom and rejecting the assistance of mystics and crystal balls, the judge concentrated on the rather more mundane task of reviewing the evidence in order to determine the answer to this tricky question. He concluded that this suggested that LPC was not really in the market for top-end lines – explaining at [118] that LPC “would not have paid for expensive technology that [it] did not need”, regardless of the benefits that this might have brought.

Moving on to the attendant question of whether Perni had also been deprived of consequential sales (of additional equipment and aftersales services such as servicing, maintenance, spare parts, consumables and upgrades), Norris J considered that such aftersales lines and extra modules would be added to the purchased machinery and that they were not in principle too remote for damages to be recoverable for them but that, nevertheless, the exact nature of the aftersales that would have been made was not specified in the judgment (see discussion to this end at [121] and [166]).

Quantification

Having assembled the relevant pieces of the jigsaw, the judge now moved to consider the picture so revealed. Again, beginning from first principles, Norris J noted that the job of the court was to compensate the claimant and not to punish the defendants. Accordingly, peering into the murky waters of possibility, he explained that Perini had lost the chance to supply two lines in accordance with its quotations provided to LPC at the time. Following some discussion, this was concluded as being a theoretical maximum of 3.824 million Euros.

However, this was not the end of the matter: the judge then asked whether the loss should be disregarded as being too speculative – i.e. was there any chance at all that Perini would have actually made the sale? PCMC’s position was that it got the contract with LPC because it could complete the order for a specific deadline, which Perini could not do. After reviewing the evidence, the judge concluded that the scheduled delivery date initially suggested by Perini was not immutable. It could have accelerated production and got things ready more rapidly. Accordingly, Perini’s chances of securing the contract could not be considered to be so remote as to be ignored completely.

But how large were they? Again applying conjecture to the assembled documents, the judge explained that, taking into account a number of factors (including, inter alia, Perini’s market share; its offer of a 40% discount on its usual prices; the competition in the area; the possibility of departing from Perini’s suggested schedule of delivery and the contingencies that could be put in place if delay was a real problem), Perini’s chance of success at obtaining the contracts was 65%

Other issues: the Georgia Pacific contract

PCMC had also supplied another company, Georgia Pacific, with machinery that when used would infringe the patented process. The question of whether Perini could run a user, a supply, or a joint tortfeasor case against PCMC in respect of this (even though Georgia-Pacific was not a party to the main proceedings) was addressed by the judge. He noted at [44] that it had been accepted by PCMC that Perini was entitled to pursue damages “from PCMC for acting pursuant to a common design with Georgia-Pacific in the infringing use of tail sealing technology incorporated in line 17”, but that the enquiry was limited to the liability of PCMC as joint tortfeasor in respect of the Georgia-Pacific contract.

Applying the same principles as set out above, Norris J considered that Perini’s lost chance of sale in respect of the Georgia-Pacific line was 25% on a speculative sale price of 2.157 million Euros.

Katnotes

With speculation layered upon speculation, the task of peering into the murky waters of probability to make an assessment of damages is something that is clearly not undertaken lightly. As far as a game of pin the tail on the donkey goes, the court clearly does its best to try and bring a semblance of rationality to an inherently arbitrary assessment of chances and possibilities in an alternative reality.

The IPKat notes that this judgment follows nine days in court spent arguing the toss over damages. That's one day more than the total of eight days spent at trial (six days) and before the Court of Appeal (two days). He can't help wondering if the parties wouldn't have saved themselves a good deal of time and trouble if they'd been able to sort damages out between themselves rather than flying off into the distant galaxies of speculation: now that we are getting so much better at pre-trial case management, perhaps we should give more attention to improving post-trial case management too.

Merpel and the IPKat would like to add one little thing with regard to their colleague Annsley of AmeriKat fame.  Though Annsley is far too modest to mention it herself, she was on the winning side in this case and put her heart and soul into it.   The word around the courts is that she was a monumental star! We all knew that anyway.