[Guest post] Est “modus” in rebus – Italian Supreme Court says no automatic award of a reasonable royalty following trade mark infringement

Katfriend Gabriele Girardello (Pavia Ansaldo) reports on a recent decision of the Italian Supreme Court concerning damage calculation in cases of trade mark infringement.

Here's what Gabriele writes:

Est “modus” in rebus – Italian Supreme Court says no automatic award of a reasonable royalty following trade mark infringement

by Gabriele Girardello

Over time, the Italian Supreme Court has issued several decisions concerning damage assessment in case of IPR infringement and, in particular, the ‘reasonable royalty criterion’ in 2021.

The latest decision in this string of cases is the Supreme Court decision n. 24635 of 13 September 2021.

The decision

In this instance, a company operating in the manufacturing and sales of shirts sued a competitor for trade mark infringement.

The trade mark owner carries out its business through direct channels (e-commerce and single-brand shops) and its activity is characterized by the use of a rather well-known brand: “CAMICISSIMA” (literally meaning a superlative of ‘shirt’ in Italian, which could be translated as “supershirt”, therefore having arguably been the object of a secondary meaning phenomenon). This said, the trade mark of concern in this case was not CAMICISSIMA, but another trade mark instead, i.e. “MODO” (which literally can be translated into English as ‘mean’ or ‘way’... and in Latin as mŏdus), that the plaintiff has owned for over 20 years, although using it to a limited extent, so to at least avoid revocation due to non-use.

The infringement of the MODO trade mark by the competitor was literal, as the infringer had been using the same sign to identify its shirts. In such a context the court of first instance (obviously) declared that an infringement had occurred and, in the absence of significant elements to calculate the damages, held that they could be awarded by applying the ‘reasonable royalty’ criterion, as requested by the trade mark owner. In particular, the court set the royalty rate at a minimum of 2.5% (compared to a possible maximum of 10.5%) of the turnover of the infringer. That was done in consideration of the limited diffusion of the trade mark in question, as also inferred from the evidence offered by the plaintiff.

The infringer appealed against, only with reference to the award of damages. The court of appeal reversed the first instance decision, stating that even if the reasonable royalty criterion is a suitable way to assess damages, it cannot be used as an ‘automatic’ consequence of infringement.

The trade mark owner therefore filed one final appeal to the Supreme Court. It is worth recalling that the Italian Supreme Court is not a court on the merits, but is rather only competent to provide the correct interpretation of the law.

The trade mark owner claimed that the court of appeal had erred, since the reasonable royalty criterion is a ‘residual’ criterion and the loss of profit can always be determined according to the criterion known as the 'fair price of consent', by awarding an amount not lower than the royalty that the infringer would have had to pay to obtain a regular licence from the owner of the right infringed. And this regardless of the degree of reputation and diffusion of the trade mark, thus representing a minimum standard criterion for the award of damages.

In this regard the trade mark owner recalled, in particular, the second paragraph of Article 125 of the Industrial Property Code, which reads as follows (all translations from decisions are mine):

The judgment that rules on the compensation of damages may establish payment of an overall sum set based on the proceedings in the case and the presumptions that result from them. In this case the loss of profits shall however be determined as an amount not less than the royalties that the author of the infringement would have had to pay, had he obtained a license from the owner of the infringed right

The Supreme Court rejected the request of the trade mark owner, upholding the decision on appeal instead. It held that a loss of profit for a trade mark owner “cannot be automatically assumed and in particular it cannot be assumed that every sale made by the infringer is a sale not made by the right holder”. Subsequently, the Supreme Court affirmed that the court of appeal had been right not to award any damages, since the owner of the MODO trade mark had not “proved the dilution of the trade mark” and had not proved “any specific fact giving rise to damage by reason of the infringement of the trade mark”.

Comment

This decision has been seen with some concern by Italian commentators, who consider that it might make it more difficult to obtain an award for damages based on the reasonably royalty criterion. Usually, in fact, the latter is invoked when the rightholder is in fact unable to prove a reduction in its sales.

This said, the decision also clarifies that the criterion indicated by Article 125, paragraph 2 fulfils the purpose of facilitating the burden of proof by the holder of the allegedly infringed right, which may amount to an attenuation of the same burden but cannot result in an absolute exemption from compliance with the same.

We may at this point also observe that the ruling is very much tailored to the case and justified by factual circumstances, whereby the alleged trade was almost not ever used by the owner. The Supreme Court set out a number of elements in support of this position:

• The trade mark, although registered for 38 years, was almost unknown on the market;
• It had not been proved that any product bearing the infringed trade mark was marketed in the shops indicated by the plaintiff;
• The turnover of the products bearing the infringed trademark had always been negligible;
• No evidence had been provided that the trade mark had ever been advertised and, on the basis of “some checks on the search engine ‘Google’” – said the Supreme Court –, was almost unknown to the public.
• Above all, there was no proof "of the actual marketing of the product, such as to demonstrate the knowledge of that mark among the relevant public".

It is worth noting that another decision of the Supreme Court issued this year, n. 5666 of 2 March 2021, had been far more favourable to the applicability of the reasonable royalty criterion. That decision in fact recalled that damages can also be proved on the basis of simple “circumstantial elements offered by the injured party” and it also specified that the owner will not even have the burden of proving "what would have been the certain royalty in case of hypothetical request", the criterion of reasonable royalty only representing a "mandatory minimum".

Nevertheless, this other case related to patents, where probably the lack of a regular use of the right on the market by the rightholder may be seen with less severity (patents being sometimes also used only for defensive purposes or to keep competitors out of a certain market).

So the impression is actually that the recourse to the reasonable royalty criterion will be now a bit less easy in trade mark cases in Italy, especially when enforcing ‘dormant’ registrations.

Needless to say that all rightholders always have another remedy against infringement, which is requesting the recovery of profits of the infringer (retroversione degli utili). The latter, also according to the most recent decision of the Supreme Court (n. 21832/2021), does not require any proof of an actual damage by the rightholder: instead, it is an automatic consequence of a declaration of infringement.