Posted: January 5th, 2022
With Decision No. 21832 of 29 July 2021, the Italian Supreme Court clarified: (a) what the relationship is between compensation for lost profits under Art. 125(1) of the Italian Intellectual Property Code (“IPC”) and recovery of profits under Art. 125(3) IPC; and (b) whether the recovery of profits requires wilful intent or negligence by the infringer.
Summary of the case
Providus S.r.l. manufactures cartridges of liquefied compressed gas for camping equipment. Its cartridges are equipped with a security device to minimise the risk of gas leakage.
Guilbert Express SA and Plein Air International S.r.l. are the co-owners of European patent no. 1406041 (entitled “Security device for puncturable cartridge”), which concerns a security device allegedly infringed by Providus’ products.
In May 2014, Providus initiated patent revocation and DNI proceedings against Guilbert and Plein Air before the Court of Milan. The defendants claimed that their patent was valid and infringed and thus asked for injunctive relief, withdrawal of the infringing products from the market, payment of damages and, in any case, recovery of profits under Art. 125(3) IPC.
In its decision of 10 July 2018, the Court of Milan ruled that the patent was valid and infringed but refused to award damages under Art. 125(1) IPC – which implements Art. 13(1)(a) of Directive 2004/48/EC (“Enforcement Directive”) – in the absence of evidence of a relationship between the lost profits allegedly suffered by the patent owners and the (allegedly unfair) profits made by Providus.
However, the court held that Art. 125(3) IPC – which implements Art. 13(2) of the Enforcement Directive – does not require any such evidence and therefore ordered the recovery of profits under Art. 125(3) IPC. As to the calculation of the infringer’s profits, the court ruled that the sale of the cartridges as a whole was not to be taken into account because: (a) the patent covers only the security device, (b) end consumers were not made aware of the presence of the security device, and, therefore (c) the security device was not a decisive factor in end consumers’ purchasing decisions. Accordingly, only the infringing security device was taken into account when calculating Providus’ marginal revenue.
Providus appealed the decision, arguing that the court was wrong to order recovery of profits under Art. 125(3) IPC.
With its decision of 22 May 2019, the Court of Appeal of Milan upheld the first-instance decision with respect to the recovery of profits issue; Providus subsequently challenged the appeal decision on the same grounds before the Supreme Court.
The Supreme Court decision
The Supreme Court – after carrying out a detailed examination of Art. 125 IPC and considering the amendments introduced to implement Art. 13 of the Enforcement Directive – held as follows.
a. The relationship between compensation for lost profits and recovery of profits
First, the Supreme Court noted that Art. 125(1) IPC refers to unfair profits made by the infringer as one of the aspects to be taken into account when calculating damages. Although Art. 125(1) IPC envisages the equitable assessment of damages, it does not release right holders from the obligation to prove that a given infringement caused damage. For example, to be entitled to compensation for lost profits under Art. 125(1) IPC, right holders must prove that they would have been able to reach the same market served by the infringer. If a right holder provides evidence to that effect, the court may determine the exact amount of damages owed to the right holder on an equitable basis. Art. 125(2) IPC – which implements Art. 13(1)(b) of the Enforcement Directive – further eases the burden of proof on right holders by stipulating that damages owed to a damaged right holder may be set as a lump sum calculated based on all elements of the case, and that the lump sum must be no less than the amount of royalties the infringer would have had to pay had the infringer obtained a licence from the right holder.
Art. 125(3) IPC establishes another form of lump-sum compensation, which – as pointed out by Supreme Court decision No. 5666 of 2 March 2021 – performs “if not properly a sanctioning function, a function aimed at least at preventing the infringer enriching itself through the unlawful exploitation of a third party’s IP right”. The Supreme Court thus pointed out the sui generis (i.e., partly compensatory and partly dissuasive/deterrent) function of the recovery of profits: namely, that it aims to prevent the infringer benefitting in any event from the infringement (unjust enrichment) by depriving it of its unjustly gained profits, which are then awarded to the right holder regardless of whether the right holder would have achieved the same profits made by the infringer had the infringement not occurred.
Therefore, the Supreme Court held that – as opposed to compensation for lost profits under Art. 125(1) IPC – the recovery of profits under Art. 125(3) IPC does not require evidence that the right holder suffered a loss of profits because of an infringement. The Supreme Court’s reasoning was as follows:
· the title of Art. 125 refers to two different remedies: “compensation for damage” and “recovery of profits”;
· Art. 125(3) establishes that right holders may seek recovery of profits “in any case” and even “to the extent they exceed compensation for lost profits”, which means that recovery of profits may be sought even if the requirements for compensation for lost profits are not met; and
· Art. 125(3) would be useless if recovery of profits required evidence of lost profits, as Art. 125(1) already requires that evidence and lists unfair profits made by the infringer as one of the aspects to be taken into account when calculating damages.
b. The irrelevance of wilful intent or negligence when seeking recovery of profits
The Supreme Court held that right holders may seek recovery of profits even if the infringer did not act with wilful intent or negligence.
The Supreme Court emphasised once again the wording of Art. 125(3) IPC, which establishes that right holders may seek recovery of profits “in any case”. According to the Supreme Court, this means that recovery of profits may be sought even if the infringement was not wilfully or negligently committed – the only requirement being the unjust enrichment gained by the infringer because of the infringement. This interpretation of Art. 125(3) IPC is consistent with Art. 13(2) of the Enforcement Directive, which states that “where the infringer did not knowingly, or with reasonable grounds to know, engage in infringing activity, Member States may lay down that the judicial authorities may order the recovery of profits or the payment of damages, which may be pre-established”.
The Supreme Court further clarified that if the infringer knew or should have known that it was infringing a third party’s IP right, the right holder may claim both compensation for damage under Art. 125(1) and recovery of profits under Art. 125(3) – the latter either as an alternative to compensation for lost profits or to the extent that the infringer’s unfair profits exceed that compensation. Conversely, if the infringer did not act wilfully or negligently, the right holder may claim only recovery of profits under Art. 125(3) IPC.
It is interesting to note how the recovery of profits performs a different function depending on the nature of the infringement: for wilful or negligent infringements, it essentially performs a dissuasive function, as it allows right holders to recover profits that exceed the lost profits suffered; whereas for innocent infringements, it performs a purely restitution function.
The Supreme Court thus upheld the appeal decision and underlined the following principle of law: Right holders may seek the recovery of profits instead of compensation for lost profits, with no need to specifically allege or demonstrate that: (a) the profits made by the infringer would have been made by the right holder had the infringement not occurred, or (b) the infringer acted with wilful intent or negligence.
The further issue of how to determine what of the infringer’s profits the right holder is entitled to recover under Art. 125(3) IPC is thus not addressed. Indeed, although Art. 125(3) IPC does not require evidence of damage suffered (and thus does not require a causal link between the infringement and the damage), it nevertheless requires evidence of a causal link between the infringement and the infringer’s unfair profits. As the Court of Milan pointed out in the first-instance decision, if a given patent covers only one component of an entire product and the presence of that component is not a decisive factor in consumers’ purchasing decisions, the right holder is entitled to recover not all of the infringer’s profits made in selling the product as a whole but only a portion of the profits that takes into account the value that the infringing component gives to the entire product.
A copy of the decision can be read here.
Summary: Giulia Pasqualetto, BonelliErede