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New rules for calculating compensation for pirated goods

In Resolution No. 28-P by the Russian Federation Constitutional Court, dated December 13th, 2016, entitled “On the case to verify the constitutionality of subclause 1, article 1301, subclause 1, article 1311 and subclause 1, clause 4, article 1515 of the Russian Federation Civil Code due to requests from the Altay Region Arbitration Court”, the provisions indicated are recognized as being partially inconsistent with the Russian Federation Constitution concerning clause 3, article 1252 of the Russian Federation Civil Code. The adoption of this Resolution entailed a change in the established procedure for determining compensation for violations concerning intellectual property assets.

Ways to protect exclusive rights and types of compensation

Intellectual rights in Russia are protected overall by the methods provided for by the Russian Federation Civil Code (hereinafter – the RF CC), the list of which, as follows from article 12 in the RF CC, is not exhaustive.

If we speak in general terms, then the methods to protect intellectual property spelled out in current legislation are quite numerous. They can be divided into 4 provisional groups:

1) Recognition of rights.

2) Restoration of the situation that existed before the violation of the law, and suppression of actions that violate the law, or threaten to violate it.

3) Compensation for losses.

4) Self-help.

To date, the most common methods for protecting intellectual property can be considered claims to protect exclusive rights linked to violations of those rights concerning IP asset identifications, trademark rights, and rights to domain names in the Internet, and claims for reimbursement for losses, or compensation.

As per article 1301 in the RF CC, if there is an infringement of the exclusive rights to a work, then the author or other rights holder, along with using other applicable means to protect rights and enforce liability that are established by this code (articles 1250, 1252, and 1253), may, in accordance with clause 3, article 1252 of this code, choose to claim a compensation payout instead of reimbursement for damages in the amount of 10,000 to 5,000,000 rubles as determined by the court at its discretion - or twice the amount of the cost of copies of the work or twice the cost for the right to use the work as determined based on the price which, under comparable circumstances, is usually charged for the lawful use of the work.

The amount of damages to be reimbursed must be established with a reasonable degree of accuracy, taking into account all the circumstances of the case, proceeding from the principles of fairness and proportionality of the liability regarding the violation that was committed. At the same time, the sense of clause 1, article 15 in the RF CC means satisfaction for claims for the reimbursement of losses cannot be declined solely on the grounds that their exact size is impossible to determine (clause 12 of the Resolution No. 25 by the Russian Federation Supreme Court Plenum, dated June 23rd, 2015 entitled “On the courts applying certain provisions from section 1 in the first part of the RF CC”).

Due to the great variety of individual characteristics for intellectual property assets, owing to their intangible nature, rights holders are limited in the ways that they can control compliance with the exclusive rights that belong to them resulting from third-party intellectual activity and activity related to IP asset identifications, identify violations that have been permitted to occur, and possibly establish the exact, or at least the approximate, scope of the losses that they have incurred (especially in the form of loss of expected profit) – especially if the violation has been committed in the bounds of entrepreneurial activity.

Taking these specifics into account, which predetermine the necessity of setting up special ways to guard against infringements of exclusive rights to intellectual property assets, the RF CC provides rights holders the right, in cases covered by the Code for certain types of outcomes stemming from intellectual activity or IP asset identifications, to demand appropriate compensation payout from the offender instead of reimbursement for losses, and releases them from proving the amount of damages caused in court. The amount of compensation that is recoverable in the event a violation is proven, as follows from clause 3, article 1251 of the RF CC, is determined by the court within limits established by the Code and depending on the nature of the violation and other circumstances of the case, considering the requirements of reasonableness and fairness. If one act violates rights to several products of intellectual activity or to several IP asset identifications, the amount of compensation is determined by the court for each product of intellectual activity or IP asset identification that has been used.

Calculating compensation amounts: regulatory enforcement practice

In practice, difficulties providing an individual approach to determining compensation for violations to rights to intellectual property assets arise mostly in so-called multiple violations, when one unlawful activity violates the rights to several products of intellectual activity.

One problem of primary importance is proving the fact of multiple violations itself. For example, if the rights holders petition the court with a claim for reimbursement for the infringement of rights to several portions of one piece of work (for example, cartoon characters), then they must prove that these portions are each an independent product of intellectual activity, otherwise compensation will be recovered for violating rights to the product as a whole (Based on the Ruling No. 309-ES14-7875, dated June 11th 2015, from the Russian Federation Supreme Court in case No. А50-21004/2013, a portion of a work is deemed independent if it can be used independently of the work as a whole). Using trademarks or IP asset identifications that are interconnected with each other, in a similar fashion, will be judged as a single violation.

At the same time, it is interesting to note the position of the courts on the issue of the plurality of violations to the exclusive rights to musical works. In clause 2 of the Review of Judicial Practice in Cases Relating to the Settlement of Disputes on Protecting Intellectual Propert Rights (approved by the Russian Federation Supreme Court Presidium on September 23rd, 2015), the finding is made that each musical work (song) contained on an illegally distributed disc is an independent asset covered by exclusive rights, and can be protected by recovering compensation calculated in an amount for each product indicated.

As similar finding is made in respect to the specifics of calculating compensation for an illegally used trademark.

For example, the text of clause 32 of the Review sets forth the legal position of the RF Supreme Court, according to which the illegal placement of several different trademarks on the same tangible medium is a violation of the exclusive rights to each trademark.

A limited liability company petitioned the arbitration court with a claim against an individual entrepreneur to collect compensation from him for violating the exclusive rights to three trademarks placed on the goods (albums) sold by the entrepreneur without consent from the rights holder.

By decision of the arbitration court of original jurisdiction, which was upheld by the arbitration court of appeal, the plaintiff’s claim was partially satisfied. When calculation the compensation amount, the courts went by how much the defendant had sold of one kind of good, and considered the one-time nature of the violation and the lack of information about any violations previously committed by the defendant.

The arbitration court of cassation overturned the ruling by the arbitration court of original jurisdiction, and via a resolution from the arbitration court of cassation on the amount of compensation it satisfied the plaintiff’s claim in full.

In addition, the arbitration court of cassation indicated that the courts, by recovering compensation in a minimal amount, did not consider each of the three trademarks an independent asset covered by exclusive rights that was subject to protection.

In accordance with clause 3, article 1252 of the RF CC, if one action violates the rights to several products of intellectual activity IP asset identifications, then the amount of compensation is determined by the courts for every product of intellectual activity or IP asset identification that has been used illegally; in a situation where the violation affects interrelated but separate intellectual assets (for example, violations of rights to a three-dimensional trade mark that is also an industrial design) then measures to enforce liability for each asset are taken independently of each other.

Because of this, legal advisors often recommend to rights holders that one material asset be registered as several intellectual property assets.

Since a plurality of violations of intellectual property rights is often associated with the existence of difficulties proving the amount of losses in each individual case, it is advisable to calculate the amounts involved in claims for compensation using a fixed method – an amount ranging from 10,000 to 5,000,000 for each product of intellectual activity used illegally.

Other options for calculating compensation are usually used when it is possible to prove the number of counterfeit copies made of the intellectual property asset, as well as the scope of the violation.

However, the main problem with ensuring an individual approach while reviewing claims for the recovery of compensation for the infringement of intellectual property rights still remains the absence of an appropriate legal mechanism, as well as precise criteria for achieving proportionality in respect to the amounts of compensation and the scope of incurred losses.

Clause 3, article 1252 of the RF CC allows the courts to decrease compensation amounts lower than the limits established in the Civil Code, but no lower than below 50% of the minimal amounts for all the compensation for the violations that have been committed.

However, in practice situations arise when compensation that is decreased on the basis of the indicated article remains excessive, but cannot be lowered any more due to limitations established by law.

A step towards ensuring the principles of proportionality and fairness regarding compensation was made by the Russian Federation Constitutional Court Resolution No. 28-P, dated December 13th, 2016, according to which it is permissible to deviate from the limitations defined in subclause 1, article 1301, subclause 1, article 1311 and subclause 1, clause 4, article 1515 of the RF Civil Code in conjunction with the third paragraph of clause 3, article 1252 of the RF Civil Code to reduce compensation amounts for the violation of rights to the products of intellectual activity that are recoverable from an individual entrepreneur, provided that, even considering any possible decrease, the amount to be paid out as compensation exceeds the scope of losses incurred by the rights holder many times over (given that these losses lend themselves to calculation with a reasonable degree of accuracy, and their excessiveness must be proved by the defendant), and if the circumstances in the specific case bear particular testimony to a violation that has been committed by an entrepreneur for the first time, and provided that using the intellectual property asset covered by other peoples’ exclusive rights did not amount to a substantial portion of the entrepreneur’s business activity, and was not a gross violation (for example, if the seller was not patently aware of the counterfeit nature of the goods being sold).

The Constitutional Court highlighted the following as distinctive ‘criteria’ that permit deviating from the principles of justice, equality, and proportionality:

а) The offender is registered as an individual entrepreneur;

b) The violation was committed in respect to several intellectual property assets;

c) The defendant proves that the compensation amount exceeds the scope of losses incurred by the rights holder many times over;

d) The violation was committed for the first time;

e) Using the counterfeit goods is not the main ‘business’ for the offender;

f) The offender was not aware of the counterfeit nature of the goods being sold.

However, an issue that remains unresolved is the possibility of reducing compensation amounts below the minimum limit if violation of the rights to the products of intellectual activity has been committed by a legal entity, as well as the criteria that the courts should be guided by in these cases. The condition obligating the defendant to calculate and prove the actual scope of losses incurred is quite controversial, considering that the plaintiff, because of the specific nature of disputes concerning the protection of intellectual property, has been released from this responsibility by legislators. Essentially, the Constitutional Court imposes on the defendant the obligation to establish that which, for objective reasons, cannot be established in these kinds of disputes. As follows from the explanations contained in clause Resolution No. 15, dated June 19th, 2006, by the Russian Federation Supreme Court Plenum entitled ”On issues arising in courts when considering civil cases involving the application of copyright and related law and rights”, when resolving the issue concerning which party is required to prove the circumstances relevant to a case involving the protection of copyright and related rights, the court must take into account that the plaintiff must confirm the fact that he has copyright and/or related rights, or the right to protect them, as well as the fact that the defendant has impinged on these rights.

Since the changes being drafted right now to article 1252 of the RF CC (Bill for FZ 02/04/02-17/00061822 entitled ”Оn introducing changes to article 1252 of the RF Civil Code”.) are limited only to incorporating the position of the Constitutional Court, and do not presume drafting and introducing additional ideas that further develop Resolution No. 28-P, it seems that the issue of observing the principles of proportionality and fairness regarding compensation for the violation of rights to the products of intellectual activity will remain unresolved for the time being.