Damage Compensation

It is tort to infringe an IP right in Korea, too. As a civil law principle, damage of torts will be awarded for those which have been the direct and natural consequence of the defendant’s infringing activities.

Unlike U.S. courts, Korea courts never award "punitive," "exemplary" or "aggravated" damages for infringement of IP rights. No treble damage award is possible. It is same to all cases no matter how serious infringements are. And there is no willful infringement clause and thus intent or negligence is treated as being same. There are 3 ways to calculate damage.

1. Lost Profit

Where a patentee and an infringer compete, lost profit award is an appropriate remedy. Lost profit is the sum of profit that a patentee would have gained if the patent had been not infringed. According to the Korean patent act, lost profit of a patentee can be calculated by multiplying the patentee’s profit per product unit by total numbers of product that could be sold but for infringement.

Lost profit is not presumed and a patentee has the burden of proof. A patentee must show reasonable probability that it would have made infringer’s sale. Patent infringement can reduce patent owner’s profit in a number of ways. First, the infringer may divert sales from the patent owner. Second, competition from the infringer may cause the patent owner to reduce his price, and thus earn lower profit on those goods he continues to sell. A third possible effect is that the infringement causes the patentee to suffer additional costs, such as increased advertising and marketing expenditures.

Courts have considered awarding damages for such asserted harms as lost future profits, injury to the patent owner’s reputation resulting from the sale of poor-quality infringing goods, and the infringer’s accelerated entry into the marketplace once the patent expires. For diverted sales, a patent owner must show demand for the patented products, absence of acceptable non-infringing substitutes, manufacturing capability to exploit demand, and profit.

A patentee may seek lost profit for convoyed sales but the functional relationship between a patented invention and convoyed sales must be established.
The total amount of damage is largely correlated with the profit per unit. When incremental profit (so called marginal profit or contributory profit) is used for the computation of damages, the total amount will be large. Incremental profit is the profit that the patentee could have made when he sold just one more patented product, and is the amount excluding only the variable cost from the sale price of a product. Based on the incremental profit, the patentee may receive the greatest amount of monetary remedy that he could have gained through the use of a patent.

The Korean Patent Act added another manner of presumption. When the patentee is capable of supplying products competing with the infringing product, he may presume that his lost profit is equal to the amount calculated by multiplying his profit per unit by the number of units sold by the infringer. As a rule, lost profit is measured as the difference between the profit that the patentee would have earned but for the infringing sales and the profits the patentee actually earned. Profitability should be calculated using incremental cost, which excludes the costs that would be incurred in both the actual and but-for markets. The difference in costs, whether expressed on a total or per unit basis, is the incremental-cost concept.

The major pitfall when measuring incremental cost is that many firms allocate both fixed costs, e.g., depreciation, and common costs, e.g., marketing and administration, to their internal accounts that might be used to calculate incremental costs. Accounting and statistical analysis are often required to remove these allocations to calculate profits properly.

2. Infringer’s Profit

A patentee may recover damage based on the infringer’s profits. Under Korean practice, it is the most common for a patentee to seek damage compensation based on the profit of infringer. It is well settled that the meaning of profit for this purpose means the actual profit. In principle, there might be three ways to compute the profit of the infringer in case of the presumption of the profit of the infringer to be the damage: (1) total sales minus the cost of production (2) total sales minus the cost of production, the distribution cost, general management expenses, and taxes, and (3) total sales of the infringer minus the variable cost according to the increase of production. The actual profit here means the amount of money in which all costs are subtracted from the sale price.

Courts have often used statistic data published by the Korean Customs. The data is used for levying income tax through calculating profit by sales x standard profit ratio in a specific business. The data are published every year and accessible on the website.

Usually the infringer defends himself by proving the actual profit is small. A patentee may not complain that the infringer operates his process inefficiently or unprofitably and should have generated greater profits by taking an alternative course. The patentee must take the infringer and actual profits made as he finds them. The maximum payment is the total profit made by the infringer. Thus, if different patentees seek accounts of profits for different infringing activities within the single business of the infringer, the total amount payable cannot exceed the total profits made.

3. Reasonable Royalty

This is based on a hypothetical method treating the patentee and the infringer of the patent as if they had signed a license agreement. The licensee, i.e., that infringer, has to pay the license fee that would have been agreed for such a license by reasonable contractual partners. The position of the infringing party is fundamentally no worse than that of a contractual licensee. He does not have to pay a particularly high license fee as punishment for the infringement, but instead is treated not as though he had infringed the patent but as if he had signed a license agreement with the patentee for the use of the invention.

Legal rulings have always turned away from adding "penalty surcharges" to the license fee as a sanction in response to the infringement of the patent. For this reason it is not material whether the party committing the infringement has done so willfully or only by negligence. This meant that the infringement of a patent represented only a minimal risk for the party committing the infringement. The least fortunate infringer, judged guilty of infringing a patent, would pay the license fee that he would have had to pay if he had initially sought to obtain the approval of the patentee for the use of the invention. However, the royalty rate applied to the infringer is lower than or the same as the ones agreed upon without litigation and there is little incentive to be an honest licensee. Therefore, the conservative approach taken by the courts has been the target of severe criticism.

The reasonable royalty functions as a minimum compensation for infringement, although the Korea law does not expressly provide for this. The formula concerning the calculation of reasonable royalty is the total sales of defendant with respect to the infringing product multiplied by the reasonable royalty rate. Factors to be considered when determining a reasonable royalty rate depends upon whether plaintiff has granted similar license to third parties and at which specified rate of royalty.

If the plaintiff has not provided license to third parties, then the reasonable royalty rate will be determined by the court based on assertions and evidence provided by the parties, including the official industry statistics. In sum, reasonable royalty will be determined based on the rate of other existing license contracts, the established customs of the field of commerce field that the patent pertains to, and others.

4. Court’ Discretion

In practice, it is really hard to prove an exact amount of manage caused by infringing a patent. Considering such difficulty, the Korean patent law allows that courts have discretion to decide a moderate and adequate amount of damage when the infringement has been found. In theory, it is possible not to award damage compensation to a patentee in case there is no sufficient evidence to prove an amount of damage, even though infringement has been found. Court desertion may prevent such unreasonable results. It eases the patentee’s burden of proof.

5. Apportionment

Apportionment is one of controversial issues. An infringer only has to account for profit from the infringing products or processes. Where only part of a product infringes, profits are apportioned between those which were caused by or attributable to the use of the patented invention and those which were not. However, where the invention is the essential ingredient in the creation of the infringer’s whole product or process, it may be appropriate not to apportion.

Before apportionment the infringer may deduct from revenues allowable costs. The following costs may be deducted: relevant research and development costs; costs of construction or operating the plant or process; and for direct costs such as manufacturing and distribution costs. Income from the exploitation of any other technology results from the research and development must be deducted from the overheads.