Patents - Damages Inquiry: Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd
This is the latest episode in a marathon case that has already made a lot of interesting law. The claimant company, Ultraframe (UK) Ltd ("Ultraframe")., designs and makes modular conservatory roofing systems. One of its products, the Ultralite 500, is partly protected by UK patent no GB2300012 and partly by unregistered design right. The defendant, Eurocell Building Plastics Ltd. ("Eurocell"), makes and sells window and door systems, conservatory roof systems, PVCU profiles and rooflines. Until 2002 Eurocell distributed Ultraframe's Ultralite 500 system. In that year it started to make and sell its own system known as the "Pinnacle 500". Ultraframe alleged that the "Pinnacle 500" infringed its patent and design rights and sued Eurocell for the infringement of those design rights.
Mr Justice Lewison held in Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another [2004] 1785 EWHC (Ch) (22 July 2004) that the design rights had been infringed but not the patent. In a supplemental judgment he limited the claimant's entitlement to damages by holding that the defendant could elect to take a licence of right under s.239 of the Copyright Designs and Patents Act 1988 after the design right had expired. That, of course, had the effect of limiting damages for design right infringement to twice the royalty that would have been agreed by a willing licensor and willing licensee negotiating at arm's length. Ultraframe appealed both judgments and in a 2 to 1 decision (Lord Justices Jacob and Mummery v Lord Justice Neuberger) the Court of Appeal reversed the finding on patent infringement (see Ultraframe (UK) Ltd. v Eurocell Building Plastics Ltd. and another [2005] EWCA Civ 761 (24 June 2005). That finding opened the way to an inquiry as to damages on patent infringement which came on before Mr Justice Kitchin (Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another [2006] EWHC 1344 (Pat) (9 June 2006).
At the inquiry Ultratrame sought damages for loss of profits. Ultraframe sought damages for loss of profits, the issues in dispute being the number of infringing products sold, whether the claimant would have sold even more of its own product but for the infringement and the margin of the profit on each lost sale. The significance of the point was that Ultraframe contended that it had to reduce its prices to meet the threat to its market share presented by the infringement. The precise issue in dispute was what costs should be deducted from the net price to calculate that margin. As an alternative Ultraframe claimed a royalty on the sales of the infringing products - Ultraframe claiming 17.5% and Eurocell 5%.
After considering the decisions of Mr Justice Jacob (as he then was) and the Court of Appeal in Gerber Garment Technology v Lectra Systems [1995] RPC 383, [1997] RPC 443, Mr Justice Kitchin distilled the following principles:
"(i) Damages are compensatory. The general rule is that the measure of damages is to be, as far as possible, that sum of money that will put the claimant in the same position as he would have been in if he had not sustained the wrong.
(ii) The claimant can recover loss which was (i) foreseeable, (ii) caused by the wrong, and (iii) not excluded from recovery by public or social policy. It is not enough that the loss would not have occurred but for the tort. The tort must be, as a matter of common sense, a cause of the loss.
(iii) The burden of proof rests on the claimant. Damages are to be assessed liberally. But the object is to compensate the claimant and not to punish the defendant.
(iv) It is irrelevant that the defendant could have competed lawfully.
(v) Where a claimant has exploited his patent by manufacture and sale he can claim (a) lost profit on sales by the defendant that he would have made otherwise; (b) lost profit on his own sales to the extent that he was forced by the infringement to reduce his own price; and (c) a reasonable royalty on sales by the defendant which he would not have made.
(vi) As to lost sales, the court should form a general view as to what proportion of the defendant's sales the claimant would have made.
(vii) The assessment of damages for lost profits should take into account the fact that the lost sales are of "extra production" and that only certain specific extra costs marginal costs) have been incurred in making the additional sales. Nevertheless, in practice costs go up and so it may be appropriate to temper the approach somewhat in making the assessment.
(viii) The reasonable royalty is to be assessed as the royalty that a willing licensor and a willing licensee would have agreed. Where there are truly comparable licences in the relevant field these are the most useful guidance for the court as to the reasonable
royalty. Another approach is the profits available approach. This involves an assessment of the profits that would be available to the licensee, absent a licence, and apportioning them between the licensor and the licensee.
(ix) Where damages are difficult to assess with precision, the court should make the best estimate it can, having regard to all the circumstances of the case and dealing with the matter broadly, with common sense and fairness."
The bulk of the transcript is an analysis and evaluation of the evidence which concerns this case only. In the event his lordship held that Ultraframe was entitled to damages for lost profit on lost sales of Ultralite 500, a royalty of 8% on sales of Pinnacle 500 that do not represent lost sales, damages for price depression, damages for losses post infringement caused by price depression and disruption of the market and interest.
Mr Justice Lewison held in Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another [2004] 1785 EWHC (Ch) (22 July 2004) that the design rights had been infringed but not the patent. In a supplemental judgment he limited the claimant's entitlement to damages by holding that the defendant could elect to take a licence of right under s.239 of the Copyright Designs and Patents Act 1988 after the design right had expired. That, of course, had the effect of limiting damages for design right infringement to twice the royalty that would have been agreed by a willing licensor and willing licensee negotiating at arm's length. Ultraframe appealed both judgments and in a 2 to 1 decision (Lord Justices Jacob and Mummery v Lord Justice Neuberger) the Court of Appeal reversed the finding on patent infringement (see Ultraframe (UK) Ltd. v Eurocell Building Plastics Ltd. and another [2005] EWCA Civ 761 (24 June 2005). That finding opened the way to an inquiry as to damages on patent infringement which came on before Mr Justice Kitchin (Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another [2006] EWHC 1344 (Pat) (9 June 2006).
At the inquiry Ultratrame sought damages for loss of profits. Ultraframe sought damages for loss of profits, the issues in dispute being the number of infringing products sold, whether the claimant would have sold even more of its own product but for the infringement and the margin of the profit on each lost sale. The significance of the point was that Ultraframe contended that it had to reduce its prices to meet the threat to its market share presented by the infringement. The precise issue in dispute was what costs should be deducted from the net price to calculate that margin. As an alternative Ultraframe claimed a royalty on the sales of the infringing products - Ultraframe claiming 17.5% and Eurocell 5%.
After considering the decisions of Mr Justice Jacob (as he then was) and the Court of Appeal in Gerber Garment Technology v Lectra Systems [1995] RPC 383, [1997] RPC 443, Mr Justice Kitchin distilled the following principles:
"(i) Damages are compensatory. The general rule is that the measure of damages is to be, as far as possible, that sum of money that will put the claimant in the same position as he would have been in if he had not sustained the wrong.
(ii) The claimant can recover loss which was (i) foreseeable, (ii) caused by the wrong, and (iii) not excluded from recovery by public or social policy. It is not enough that the loss would not have occurred but for the tort. The tort must be, as a matter of common sense, a cause of the loss.
(iii) The burden of proof rests on the claimant. Damages are to be assessed liberally. But the object is to compensate the claimant and not to punish the defendant.
(iv) It is irrelevant that the defendant could have competed lawfully.
(v) Where a claimant has exploited his patent by manufacture and sale he can claim (a) lost profit on sales by the defendant that he would have made otherwise; (b) lost profit on his own sales to the extent that he was forced by the infringement to reduce his own price; and (c) a reasonable royalty on sales by the defendant which he would not have made.
(vi) As to lost sales, the court should form a general view as to what proportion of the defendant's sales the claimant would have made.
(vii) The assessment of damages for lost profits should take into account the fact that the lost sales are of "extra production" and that only certain specific extra costs marginal costs) have been incurred in making the additional sales. Nevertheless, in practice costs go up and so it may be appropriate to temper the approach somewhat in making the assessment.
(viii) The reasonable royalty is to be assessed as the royalty that a willing licensor and a willing licensee would have agreed. Where there are truly comparable licences in the relevant field these are the most useful guidance for the court as to the reasonable
royalty. Another approach is the profits available approach. This involves an assessment of the profits that would be available to the licensee, absent a licence, and apportioning them between the licensor and the licensee.
(ix) Where damages are difficult to assess with precision, the court should make the best estimate it can, having regard to all the circumstances of the case and dealing with the matter broadly, with common sense and fairness."
The bulk of the transcript is an analysis and evaluation of the evidence which concerns this case only. In the event his lordship held that Ultraframe was entitled to damages for lost profit on lost sales of Ultralite 500, a royalty of 8% on sales of Pinnacle 500 that do not represent lost sales, damages for price depression, damages for losses post infringement caused by price depression and disruption of the market and interest.
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