If intellectual property rights are infringed, the rights holder may – as an alternative to compensation for the damages actually suffered or a reasonable royalty – request the surrender of the infringer’s profits.
The first step is to determine the “net profits” of the infringer. According to case law, variable costs for the manufacture and distribution of the infringing products may be deducted, whereas fixed costs may not. This includes administrative costs, directors’ salaries, plant rents, depreciation of fixed assets, etc, since these costs would have been incurred irrespective of the manufacture and/or distribution of the infringing products (4 Ob 182/13p, Grant’s, ecolex 2014/137).
In the decision 4 Ob 213/18d – LED-LENSER, rendered in 2019, the Austrian Supreme Court (OGH) – as far as can be seen – for the first time dealt with the question if and to which extent the infringer’s profits payable to the right holder are to be further reduced in order to appropriately consider the causal nexus between IP infringement and profits made.
The case concerned a design of LED metal torches, specifically the community design RCD 000718598-0004.
The defendant sold torches the design of which, despite certain modifications, was found to infringe the scope of protection of the community design right in question. The validity of the design had also been confirmed in previous invalidity proceedings conducted before the Board of Appeals of the OHIM (now EUIPO).
The main buyer of the infringing devices was the public sector, which had acquired the infringer’s torches in the course of a tender procedure for the Ministry of the Interior, police stations, fire brigades and tax authorities.
According to the facts established by the court of first instance, which the Supreme Court’s decision is based on, the decisive criterion for the purchase was the practical usability of the torches. The requirements were that the torches could fit in a carrying device, the surface design (to ensure safe handling) and a device for attaching accessories (holster, carrying loop and signal cone). According to the reasons of the decision, design or aesthetic reasons were less important.
The court of first instance awarded the rights holder the entire net profit of approximately EUR 55,000 after having deducted certain costs.
The Court of Appeal reduced this amount considerably and granted the rights holder only 10% (!) of the net profits, resulting in approximately EUR 5,500. The right holder is only entitled to claim the profits stemming from the use of the IP right in question. In the present case, the decisive factor is to which extent the purchaser’s decision was influenced by the use of the protected design. The defendant’s objection that it did not owe the full net profits was justified because the purchase decision by the Ministry of the Interior was rather based on practical grounds but on design or aesthetic reasons. Applying Section 273 of the Austrian Code of Civil Procedure – which allows courts to estimate the amount of damages if they are otherwise impossible to determine – the court ordered the defendant to surrender only a 10 % of its net profits.
This decision should be seen in the light of the circumstances of the individual case and must not lead to the conclusion that the design of a product can only influence the purchase decision if the product is a lifestyle product or traditional work of applied art. Such an assumption would not do justice to the great economic importance of industrial design. Good design usually also follows function, for which reason practical considerations of the customer often cannot be separated from aesthetic considerations.
The defendant’s assertions that the use of a validly protected design (which the defendant chose to use although there would have been alternatives!) should nevertheless be considered (largely) irrelevant for the purchase decision should be viewed critically. The same applies to statements of the defendant’s customers who willingly confirm that the design was irrelevant for their purchase decision. Courts should in any case attempt to quantify the infringer’s profits on the basis of evidence and not mere discretion.
- For a more detailed discussion of the decision and further considerations on the causal nexus between IP infringement and infringer’s profits (“Kausalanteil”), see the publication: Dominik Göbel, Der Kausalanteil beim Verletzergewinn, Medien & Recht 1/2019, p. 32ff (in German)