Damage Compensation for IP Infringement in Korea
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. It is same to all cases no matter how serious infringements are. No
treble damage award is possible. 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
an IP owner and an infringer compete, lost profits are an appropriate remedy.
Lost profits are the sum of profits that the IP owner would have gained if the IP
right was not infringed.
Under
Korean IP Acts, lost profits can be calculated by multiplying the IP owner’s
profit per product unit by total numbers of product that could be sold but for
the infringement.
Since
lost profits are not presumed, an IP owner has the burden of proof. He must
show reasonable probability that it would have made the infringer’s sale. Infringement
can reduce the owner’s profits in a number of ways. First, the infringer may
divert sales from the owner. Second, competition from the infringer may cause
the owner to reduce his price, and thus earn lower profits on those goods he
continues to sell. A third possible effect is that the infringement causes the IP
owner 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. An IP
owner may seek lost profits for convoyed sales but the functional relationship
between the IP product and convoyed sales must be established.
Especially,
the total amount of damages is largely correlated with the profit per unit.
When incremental profit (so called marginal profit or contributory profit) are
used for the computation of damages, the total amount will be large.
Incremental profit is the profit that the IP owner could have made when he sold
just one more product, and is the amount excluding only the variable cost from
the sale price of a product. Based on the incremental profit, the IP owner may
receive the greatest amount of monetary remedy that he could have gained
through the use of IP.
As
a rule, lost profits are measured as the difference between the profits the IP holder
would have earned but for the infringing sales and the profits the IP holder
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. Stated differently, the lost profits equal the difference in revenue
minus the difference in costs. 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. The Supreme Court
recently awarded damages based on incremental profit.
2.
Infringer’s Profits
Further
an IP owner may recover damages based on the infringer’s profits. It is
possible for IP owners to seek damages based on the profit of infringer. There
are 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 in the context means the amount of money in which
all costs are subtracted from the sale price. This presumes the profit and
hence the infringer may defend himself by proving the actual profit is small.
An
IP owner cannot complain that the infringer operates his process inefficiently
or unprofitably and should have generated greater profits by taking an
alternative course. The IP owner must take the infringer and actual profits
made as he finds them. The maximum payment is the total profit made by the
infringer.
3.
Reasonable Royalty
This
method of damage calculation treats the IP owner and the infringer 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 IP holder.
Legal
rulings have always turned away from adding "penalty surcharges" to
the license fee as a sanction in response to the infringement. For this reason
it is immaterial whether the party committing the infringement has done so
willfully or only by negligence. This meant that the infringement represented
only a minimal risk for the party committing the infringement.
The
least fortunate infringer, judged guilty of infringing an IP right, would pay
the license fee that he would have had to pay if he had initially sought to
obtain the approval of the IP owner for the use of the IP. 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 statute 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 are defendant 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.
Discretion of a Court in determining Damage
Under
the Korean IP law, courts have discretion to decide a moderate amount of damage
to prevent non-compensation to an IP owner even though the infringement is
found but no sufficient evidence to prove an amount of damage exists. It eases
the IP holder’s burden of proof.
5.
Shift of Burden to Infringer
Under
the old law, a plaintiff had to prove the amount of damage, which was extremely
difficult without discovery. But the new laws make it much easier for IP owners
to prove the amount of damage. It is possible for an IP owner to calculate
damage because the other requirements can be met by his information when he
knows the sale quantity of the infringer.
6.
Apportionment
An
infringer only has to account for profits 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 IP and
those which were not. However, where the IP 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.
Statutory Damage to TM Infringement in Korea
Under the Trademark Act,
the TM owner may recover damages for trademark infringement, which generally
are limited to one of 1) the registrant's profit but-for the infringement
(calculated by multiplying the registrant's profit margin by the number of
additional articles the registrant would have sold in the absence of
infringement), 2) the infringer's profits from the infringement, 3) a
reasonable royalty, or 4) an amount of actual damages the court determines is
reasonable in light of the available evidence, if the other methods are not
feasible.
In litigation practice, it
is difficult to prove damage amount with specific number because infringers refuse
to submit critical evidence regarding the accused infringer's sales and
profits.
In 2012, the Trademark Act
adopted statutory damage clause up to KRW 50,000,000 (approximately USD 44,000).
This statutory damage provision may reduce the burden of proving trademark
infringement damages.
However, the statutory
damage provision, Article 111 requires that both the registered mark and the
infringing mark and their associated goods, services be "identical or
substantially indistinguishable," and additionally, that there be actual
use of the registered mark at the time of infringement (as opposed to the
actual damages provisions, which do not require use (though use has been
required by courts regardless)).
Recently the Korean Supreme
Court upheld the lower appellate ruling denying the plaintiff's statutory
damages claim, both for lack of use and lack of exact similarity between the
registered and accused marks. The lack of use ruling in particular may have
depended in part on the complicated ownership and use history of the registered
mark – the party that registered the mark sold the mark to another party, and
the successor's subsidiary actually used the mark, but the Supreme Court
essentially determined that that use did not accrue to the mark owner for
purposes of qualifying for statutory damages.
In summary, the statutory
damage is only applied to TM infringement case that strictly meet the
requirements of the provision.
Example - FTO Opinion Work
Freedom To Operate Opinion
l Purpose
This
is a proposal for conducting a full FTO search and analysis for the technology
a bottle with a "juicer" lid of provided by the client in Korea
market.
l Search
Scope
The scope
for searching the prior arts is limited to the registered Korean Designs,
Patents and Utility Models, which still exist valid.
l Delivery
Schedule
Our
work starts when the client’s assent to our proposal reaches us, and completes
after 14 consecutive days from our start as long as there is no further
discussion in terms of due date.
l Working
Procedure
Our working procedure
consists of three steps as follows.
Step1: Preparing for
searching the prior art – 3 days
1-1: Grasping client’s technology
1-2: Identifying sub-elements of the technology
1-3: Summarizing the technical features for each
sub-element
1-4: Determining the searching method considering
keyword, design and patent classification, patentee, etc.
Step2: Narrowing down
the searched prior art – 5 days
2-1: Searching the prior arts based on the
respective technical features
2-2: Excluding inappropriate prior arts from the
searched prior arts in terms of the client’s technology
2-3: Excluding the expired prior arts from the searched
prior arts by examining the database operated by Korean Intellectual Patent
Office (KIPO)
2-4: Analyzing the rest of the searched prior arts
and classifying them by technology
Step3: Performing
infringement analysis and Finalizing – 6 days
3-1: Deciding relevance between the client’s
technology and the prior arts which are narrowed down to through Step2
3-2: Establishing a group of prior arts (“essential
prior arts”) which have high relevance as a result of 3-1
3-2: Analyzing infringement and design-around
issues by comparing the claims of the essential prior arts with the client’s
technology
3-3: Making a final report
l Cost
Estimate
If you accept our proposal, we would assign a
Korean patent attorney who has expertise in FTO area. When it comes to the
billing rate for our patent attorney who is fit for above conditions in our
firm, at least 200 USD per hour is normally charged.
Selling "Dead Copy" Products of Unregistered Design of a New Product Punished by Criminal Penalties in addition to Civil Remedies
From July 18, 2017, under the
Unfair Competition Prevention and Trade Secret Protection Act
("UCPA") infringers who violate the "dead copy" provision
of the UCPA may be subject to imprisonment for up to three years or a fine of
up to 30 million Korean Won (approximately USD 24,000).
Under the Korean Unfair
Competition Prevention Act, the "dead copy" provision prevents selling,
leasing, displaying, or importing or exporting a product which imitates the
appearance of another's product (i.e., the shape, pattern, color, or
combination of such attributes), even though the product is not covered by any
design registration.
However, (i) the original imitated
product shall be sold, leased, displayed for sale or lease, or imported or
exported within three years of the date the original product was first created;
and (ii) the appearance of the imitation product shall not be common to
products of the same type.
This provision has been a key
to protect unregistered designs. However, under the old law, infringers who
sell "dead copy" products of unregistered design are liable for civil
remedies including damages and injunction. The old provision allowed for only
civil remedies, which have not been a sufficient deterrent in some cases, and
require a party to engage in costly civil litigation to enforce its rights.
Under the new law, by
criminal sanctions to "dead copy" infringers, the first makers
protect their rights against knockoffs of their products more effectively.
On the other hand, KIPO has
power to investigate potential "dead copy" violations cases on their
own initiative, even in the absence of a complaint from a competitor.