The Enforcement Directive permits punitive damages - or does it?

The common reading of the ECJ's (yes) recent judgment in case C-367/15 - OTK is that the Enforcement Directive (Directive 2004/48) does not compel Member States to introduce punitive damages for infringement of intellectual property rights, but allows for national law to impose punitive damages (see, e.g., the case reports on IPKat or Kluwer Patent Blog).

But a closer reading of the decision casts some doubt on this common understanding. In the answer to the question (for the background of the case see the IPKat post), the ECJ states "Article 13 of Directive 2004/48/EC ... must be interpreted as not precluding national legislation ... under which the holder of an intellectual property right that has been infringed may demand from the person who has infringed that right either compensation for the damage that he has suffered ... or, without him having to prove the actual loss, payment of a sum corresponding to twice the appropriate fee which would have been due if permission had been given for the work concerned to be used."

In the grounds for the decision, the Court further elaborates (paras. 29-31, emphasis added):

In addition, without there being any need to rule on whether or not the introduction of ‘punitive’ damages would be contrary to Article 13 of Directive 2004/48, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages.

Thus, it should be pointed out that, where an intellectual property right has been infringed, mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs — referred to in recital 26 of Directive 2004/48 — that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice (...) or payment of interest on the sums due. Indeed, OTK confirmed at the hearing that payment of twice the amount of the hypothetical royalty is equivalent in practice to compensation of an amount remaining below what the holder would be able to claim on the basis of ‘general principles’, within the meaning of Article 79(1)(3)(a) of the UPAPP.

It is admittedly possible that, in exceptional cases, payment for a loss calculated on the basis of twice the amount of the hypothetical royalty will exceed the loss actually suffered so clearly and substantially that a claim to that effect could constitute an abuse of rights, prohibited by Article 3(2) of Directive 2004/48. It is apparent, however, from the Polish Government’s observations at the hearing that, under the legislation applicable in the main proceedings, a Polish court would not be bound in such a situation by the claim of the holder of the infringed right.

From the first sentence emphasized in the passages cited above it becomes clear that the Court of Justice explicitly  did not address the issue of whether Article 13 of the Enforcement Directive prohibits punitive damages, because according to the Court, the amount payable in the present dispute does not amount to punitive damages.

Looking closely

The second emphasized sentence makes clear that a "compensation" that substantially exceeds actual damages suffered may constitute an abuse of right. This sounds harmless enough - but to assess whether the hypothetical (double) royalty exceeds the actual loss suffered, the actual loss needs to be calculated, and that is exactly what provisions setting a hypothetical royalty want to do away with, because it is difficult and costly. It also raises the question of burden of proof - generally, the burden of proof for losses suffered lies with the party claiming compensation (typically the rightsholder). Where the law provides for a double royalty payable irrespective of actual loss suffered, the burden of proof that the double royalty "substantially exceeds" the actual loss is however an exception that needs to be proven by the party invoking the exception, i.e. the infringer.

In sum, the judgment in C-367/15 - OTK leaves room for debate whether the statutory damages due in a specific case are permitted under the Enforcement Directive, and it specifically does not address whether "punitive" damages are permitted under the Enforcement Directive.

For the pointer I thank Guido Kucsko, Vienna.