Summary

Although the quantification of damages for patent infringement is heavily fact dependent, the recent Bitech Engineering v Garth Living Pty Ltd [2013] FCA 822 (Bitech v Garth) case serves to remind patentees of the underlying principles that have developed over the years. It also gives an illustration of how the Court resolves factual discrepancies and uncertainties when undertaking the assessment of damages.

Key principles

Some key principles for the assessment of damages are:

• When a patent has been found to be infringed, the patentee must elect to be compensated by either an award of damages or an account of the profits made by the infringer from the infringing conduct.
• A damages award should, as far as possible, restore the patentee to the position it would have been in had the infringements not occurred.
• The object is to compensate the patentee, not to punish the infringer.
• Although importing an infringing product is an act of patent infringement, in assessing damages the Court in Bitech v Garth placed more emphasis on the number of products sold at the retail level.
• It should not be assumed that every sale of an infringing product caused a lost sale for the patentee. Volume discounts based on alternative third party products, relative pricing and consumer behaviours are likely to apply. A further volume discount may apply if the patentee cannot demonstrate that it had capacity to meet the additional sales.
• Where a patentee does not itself make or supply products within the patent but licences others to do so, the amount of a damages award is likely to be based on a reasonable royalty rate applied to the number of lost sales.
• Where a patentee does make or supply products within the patent, the amount of a damages award is likely to be based on the patentee’s lost profit margin on the number of infringing sales (subject to any discount).

Background to the Bitech v Garth decision

Bitech  was the owner of an Australian patent for an ‘Apparatus for simulating flames’ which it applied to the design and manufacture of its ‘Optiflame’ range of heaters. In 2006, it commenced patent infringement proceedings against a number of suppliers and retailers of a range of heaters. The infringement claim failed at first instance, but on appeal the Full Federal Court found that the respondents had infringed the patent. The respondents’ challenges to the validity of the patent were unsuccessful at first instance and on appeal.

Following the Full Court’s decision, the case was remitted to the primary judge for the determination of compensation. Bitech elected to claim damages in preference to an account of the infringers’ profits. By the time of the damages assessment, the case was limited to two respondents; Bunnings and its supplier, Garth.

Federal Court judgment on damages

Bitech sought an award of damages against Garth and Bunnings to compensate it for the profits which it would have made on sales of its Optiflame heaters had the infringements not occurred. Garth and Bunnings had agreed that they would be jointly and severally liable for the damages as assessed by the Court.

To determine the appropriate method for the damages calculation, the Court dealt with each of the following issues:

1. The number of infringements

Bitech relied on importation and sales figures provided by the respondents to establish the number of heaters that infringed the patent. An expert accountant called by Bitech used these figures to quantify the number of Optiflame heaters that would have been sold by Bitech had the infringements not occurred. There were, however, significant unexplained discrepancies in these figures. In some cases, the figures indicated that the number of heaters sold by Bunnings exceeded the number imported and supplied by Garth. In other cases, the figures indicated that Bunnings had sold none or only a few of the heaters imported and supplied by Garth.

In respect of the former discrepancy, the Court took the view that the sales figures were likely to be more reliable because Bunnings is a large commercial enterprise with a publicly listed holding company whose accounts are audited. In respect of the latter discrepancy, the Court estimated the sales figures to be 75% of the importation figures on the basis that Bunnings would not have purchased hundreds of heater units without an expectation it would sell most of them.

By this approach, the Court arrived at a starting figure for the damages assessment, being the number of infringing heater units sold to the public. It was these sales that deprived Bitech of potential sales of its Optiflame heaters and caused it loss and damage.

2. Counterfactual scenario and Bitech’s lost sales

The Court agreed with Bitech that the damages award should, as far as possible, restore the patentee to the position it would have been in had the infringements not occurred. Two scenarios were before the Court as to what would have transpired had the infringements not occurred. The first was that in the absence of the infringing heaters, the respondents would not have entered the market for this type of heater at all. The second was that in the absence of the infringing heaters, Bunnings would have sourced Optiflame heaters from Bitech.

Based on evidence from employees of the parties, the Court found that the most likely counterfactual scenario was that had the respondents not supplied the infringing products, they would not have entered the market for this type of heater at all. The Court relied on evidence of prior failed supply discussions between Bunnings and Bitech to find that in the absence of the infringing products, Bunnings was unlikely to have sourced Optiflame heaters from Bitech. There was also no evidence that Bunnings could have outsourced its supply needs to another, non-infringing, supplier of heaters.

To assess damages, the question to be addressed was therefore not what profits Bitech would have made if it had supplied its Optiflame heaters to Bunnings, but what profits Bitech would have made if purchasers of the infringing heaters from Bunnings had instead purchased an Optiflame heater from the usual Optiflame sales channels.

The following general principles of damages assessment in patent proceedings were held to be apt in this case:

• Damages should be liberally assessed while recognising that the object is to compensate the patentee, not to punish the infringer.
• The quantum of damages is generally not capable of being determined precisely with mathematical exactness. The Court must often do its best on the evidence before it.
• The loss of profits approach to quantifying damages has often commended itself to courts  when the patentee is a manufacturer.
• In assessing a patentee’s lost profit, the relevant question is whether a consumer who purchased an infringing product would have purchased the patentee’s product had the infringing product never been available. It is not correct to ask whether a consumer would choose one product or the other on a side by side comparison.

The following evidence was relied on by Britech in support of its submission that had the infringing products not been sold it would have made additional sales of its Optiflame heaters equivalent to 100% of the Bunnings unit sales:

• Prior to the introduction of the infringing heaters, Bitech had an effective monopoly on the market for wholesale sale of electric flame heaters.
• Given the opportunity, Bitech had capacity to increase its production to meet the quantities of infringing heaters sold by the respondents, and could have done so without adding to its direct costs.

Bitech accepted that a small discount was appropriate to allow for the possibility that some third party suppliers of competing products would pick up some of the sales made by Bunnings.

3. Quantification of Bitech’s lost profits and relevant discounts

The Court did not accept the 100% approach sought by Bitech. Instead, the Court held that the appropriate method for calculating Bitech’s damages was:

• The number of infringing heaters actually sold to the public determined the maximum number of sales that Bitech could have lost by reason of the infringing conduct.
• The number of infringing heaters sold should be broken down by year and by model.
• The gross margin that Bitech would have made on a sale of a comparable Optiflame heater should be multiplied by the number of infringing heaters sold by Bunnings in each year.
• The patentee’s lost gross profit margins for each heater model in each year should be added together to derive the total lost gross profit margin.
• Any appropriate discounts should then be factored into the calculations.

In the circumstances, some discounts to the damages calculation were held to be appropriate. The evidence indicated that not every consumer who purchased an infringing heater from Bunnings would have otherwise purchased an Optiflame heater. Sales figures were discounted by between 8% and 32% due to market evidence of the availability of non-infringing third party products over the relevant time period. A further 10% discount was then applied to take account of contingencies including consumer price and value perception.

4. Reasonable royalty to be paid

Bitech argued that it should receive further damages in the form of a royalty in respect of those sales by Bunnings that the Court considered would not have been made by Bitech had the infringing products not been in the market.

While the Court appeared to agree with this in principle, it declined to applyany royalty aspect to the damages award because the evidence was insufficient to enable the Court to sensibly determine an appropriate royalty rate. Bitech had not licensed any third parties under the patent and only lead evidence of its gross profit margins. The Court was not prepared to use gross profit as the royalty rate, nor was it prepared to make a ‘best guess’.

In conclusion

Having come to these conclusions as to the methodology for calculating damages on the facts of this case, the Court made orders that an expert accountant for Bitech should file a further affidavit in which this methodology is applied to calculate a particular damages figure. Subject to submissions on any errors in that calculation, final orders are likely to be made by the Court.

This case is an illustration of how long it can take after commencing patent infringement proceedings before any compensation is received. Bitech is still waiting to receive compensation some 7 years after commencing infringement proceedings.

For further information, please contact:

Patrick Sands, Herbert Smith Freehills

[email protected] 

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