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Fairness and adequacy: how to ensure an individual approach in determining compensation for violation of intellectual property rights

The most common way to protect exclusive rights is the mechanism for recovering compensation provided for in p.3, Art.1252 of the Civil Code. Acting as an alternative to recovering damages, compensation releases the right holder from proving their size. However, in practice, the relative freedom of the right holder in choosing the method of calculating compensation and determining its exact size conflicts with the powers of the court to establish the final amount of the sum collected from the offender based on the principles of reasonableness and fairness, as well as the adequacy of compensation and the consequences of the violation. The article considers key judicial decisions on which existing law enforcement practice of applying p.3, Art.1252 of the Civil Code is based, as well as the criteria used by the court to justify the reasonableness, fairness and adequacy of the amount of compensation.

Institute of compensation in Russian Civil Law

Compensation, as a form of civil liability, was first secured in Russian legislation in 1992 in the Law “On the Legal Protection of Computer Software and Databases”. A year later, the provisions on compensation appeared in the Law “On Copyright and Related Rights”, and in 2002 – in the Law “On Trademarks, Service Marks and Protected Designation of Origin”.

The fourth part of the Civil Code ensured the possibility of using compensation in cases of violation of copyright and related rights (Art.1301, 1311), rights to trademarks (Art.1515) and protected designation of origin (Art.1537). Since 2014, compensation can be obtained in the event of violation of the exclusive right to an invention, utility model or industrial design (Art.1406.1).

Penalty or restoration of the property status of the right holder?

The appearance of the institute of compensation in legislation was to make protection of intellectual property rights easier and more efficient, to compensate for the relative ease of violations of exclusive rights and the difficulty of proving the amount of damages. However, the practice of applying provisions on compensation has shown that right holders require compensation in the amount which is obviously disproportionate to violation in many cases.

That is why Art.1252 of the Civil Code of the RF provides possibility for the court to determine the amount of compensation, taking into account the requirements of reasonableness and fairness.

In this case, the doctrine and jurisprudence distinguish two models of the calculation of compensation: penalty and compensatory. The literal interpretation of the articles of the Civil Code of the Russian Federation that determine the procedure for calculating compensation allows to conclude that the penalty function is more typical for claims for recovery of compensation in the double amount of the cost of counterfeit goods or a double amount of the value of the right to use the corresponding intellectual property, since the Civil Code does not explicitly accept the possibility of the court to calculate the amount of compensation in any other way. The requirement to recover a sum of money in the amount from 10,000 to 5,000,000 rubles allows the court to determine its final size independently and thereby creates conditions for recognizing the recovery nature of compensation.

However, the Civil Code does not contain clear criteria for the cases in which compensation should bear penalty nature and, therefore, be collected in a larger amount, and when – compensatory, allowing the court to reduce the size of claims of right holders that are obviously disproportionate to the nature of the violation. These criteria have been consistently worked out by judicial practice during the last 9 years that have passed since the introduction of part four of the Civil Code, but today we still cannot talk about complete clarity in this issue.

Law enforcement practice: successive expansion of discretionary powers of judges

In order to justify the reduction of recoverable sums in cases where, in the court’s opinion, they were clearly disproportionate to the nature of the violations committed, the judicial practice began to use the doctrine of the recovery nature of compensation. So, we can find the following literally repetitive arguments in many decisions of arbitration courts (see, for example, the Decision of the Thirteenth Arbitration Court of Appeal dated 18.06.2008 in case No. A56-28875/2007):

“The appointed compensation should not lead to the enrichment of one of the parties and, according to European law enforcement practice, does not refer to punitive damages. The possibility given to the court to reduce the amount of compensation is one of the legal ways provided for by law, directed against the abuse of the right of its free determination, that is, in essence, to implement the requirements of Article 17 of the Constitution of the Russian Federation, according to which the exercise of rights and freedoms should not violate rights and freedoms of other persons. In this sense, the court has a duty to establish a balance between the measure of responsibility applied to the offender and the affected interests of the plaintiff”.

The Decision of the Ninth Arbitration Court of Appeal dated 01.02.2016 No. 09AP-52966/2015 in case No. A40-91871/2014 also states that “compensation for violation of exclusive rights is a measure of civil property liability and is aimed at the restoration of violated interests, that is a payment to the right holder of such compensation for its losses, which will be adequate and commensurate with the violated interest”. The court also stressed in this decision, that measuring claims of the right holder and the nature and consequences of violations is “not only a right, but also a duty of the court”.

For the first time, the criteria from which lower courts were supposed to be guided in determining the amount of compensation to be recovered were summarized in p.43.3 of the Joint Resolution of the Plenum of the Supreme Court of the Russian Federation and the Plenum of the Supreme Arbitration Court of the Russian Federation No. 5/29 dated 26.03.2009. Such criteria are:

–nature of the violation committed;

–term of illegal use of the result of intellectual activity;

–degree of guilt of the offender;

–the presence of violations of the exclusive right of this right holder previously committed by a person;

–probable damages of the right holder.

It is noteworthy that the last of these criteria comes into conflict not only with the letter of the law (p.3 of Art.1252 exempts the right holder from proving the amount of losses), but also with p.43.2 of the same Resolution. Analysis of law enforcement practice confirms the existence of this conflict – in cases where the right holder does not provide evidence of the existence of losses to the court, the likelihood of a reduction in compensation substantially increases.

As an example in determining the scale of compensation depending on the extent of the violation and the degree of guilt of the offender can be the legal position formed in the Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 8953/12 dated 20.11.2012 in case No. A40-82533/11, where the court stated that “The possibility of bringing all known violators of the right to justice by the right holder shall be taken into account when determining the amount of compensation”, and if the plaintiff refuses to engage other offenders to participate in the case as co-defendants, the court may determine compensation in the minimum amount, taking into consideration the remaining possibility of the plaintiff to bring other persons with a higher degree of guilt in the violation committed to justice. In case of refusal –to determine the amount of minimal compensation taking into account plaintiff’s remaining possibility to bring to liability other persons with a higher degree of liability in the aforementioned violation.

The explanations contained in p.43.3 of Resolution No. 5/29 pertained to cases on recovery of compensation in the amount from ten thousand to five million rubles. Many courts have applied this clarification restrictively, pointing out that the law does not provide for the court’s right to reduce, at its discretion, the amount of compensation calculated in the form of double cost of counterfeit goods, since the specified amount was established by the legislator and recognized by it as proportionate to the violation (see Resolution of the SAC of the RF No. VAS-13447/09 dated 28.10.2009 in case No. A40-92386/08, Resolution of the Presidium of the SAC of the RF No. 3602/11 dated 27.09.2011 in case No. A08-8099/2009-30, Resolution of the Presidium of the SAC of the RF No. 498/12 dated 26.06.2012).

However, on 02.04.2013 one of the key decisions on the procedure for determining the amount of recovered compensation was adopted and significantly expanded the discretionary powers of the courts, namely the Resolution of the Presidium of the SAC of the RF No. 16449/12. The said Resolution, with the reference to the fact that the amount of compensation for the misuse of an intellectual property object should be determined on the basis of the need to restore the property status of the right holder, states that compensation for the illegal use of a trademark, stipulated in p.4 of Art.1515 is a single measure of responsibility “which is only calculated in different ways (paragraphs 1 and 2 of the Article)”. Such a logical maneuver allowed the Presidium of the SAC to recognize the court’s right to reduce the amount of compensation calculated as double cost of counterfeit goods, but not lower than the lowest limit. Nevertheless, to the present day, the opposite practice is also preserved (see Resolution of the IPC No. C01-372/2014 dated 04.08.2015, Resolution of the IPC No. СО 1 –372/2014 dated 21.05.2014).

The logic of the reduction of compensation, calculated on the basis of the double cost of counterfeit goods, was also perceived with respect to violations of rights to intellectual property objects other than trademarks. So, the court reduced the amount of compensation in a number of court decisions in proportion to the volume that is occupied by works, the rights to which are violated, in collections (see Resolution of the Presidium of the SAC of the RF No. 5816/11 dated 27.09.2011, Resolution of the SAC of the RF No. VAS-6782/12 dated 23.08.2012, Decision of Koptevskii District Court of Moscow city dated 18.06.2013 in case No. 2-1815/13).

The practice of determining the amount of compensation is inconsistent, since the court takes into account the specific circumstances of the case in each specific case. Here are just some of the criteria taken into account by the court:

–the amount of defendant’s incomes received due to violation (see Resolution of the SAC of the RF No. VAS-2752/14 dated 24.04.2014 in case No. А50-1346/2012, case No. А43-14376/2012, case No. А21-2831/2015) ;

–affiliation of plaintiff and the defendant;

–availability of facts confirming plaintiff’s consent to the use of intellectual property by defendant;

–serial nature of violations and (or) objects with respect to which the violation was committed (Resolution of the Presidium of the SAC of the RF No. 2384/12 dated 26.06.2012, Decision of the Supreme Court of the Russian Federation No. 304-ES15-15472 dated 07.12.2015, p.33 of the “Survey of judicial practice in cases related to the resolution of disputes on the protection of intellectual rights”, approved by the Presidium of the Supreme Court of the RF dated 23.09.2015);

–the role of the defendant in the production and sale of goods – as a rule, compensations recovered from sellers which did not know about the counterfeit nature of goods and (or) which did not participate in the process of production are reduced by the court to the minimum possible amounts (Resolution of the Presidium of the SAC of the RF No. 8953/12 dated 20.11.2012 in case No. A40-82533/11);

–availability of trademarks in a certain territory (case No. A34-2509/2015);

–ignoring the claims of the right holder (see case No. case No. А56-91871/2015);

–the time from the moment when the plaintiff got to know about the violation, to the presentation of the claim (suit) to the offender;

–actual use of the trademark by the plaintiff (see case No. A08-8802/2013, No. A40-91871/2014, Decision of the Supreme Court of the Russian Federation No. 300-ES15-5384 dated 15.06.2015);

–qualification of the defendant’s actions as acts of unfair competition (Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 14567/13 dated 04.02.2014);

–artistic value of the work (case No. A60-35429/2015);

–robustness of the nature of the violation (case No. А70-5860/2015).

Position of the Constitutional Court: decrease below the minimum limit vs. recognition of the penalty nature of compensation

A new stage in determining the ability of courts to reduce the amount of compensation below the minimum limit established by the Civil Code on compensation was Resolution of the Constitutional Court No. 28-P dated 13.12.2016.

Adopting this Resolution, the Constitutional Court noted that compensation had a penalty nature and was aimed at the general prevention of offenses related to intellectual property. That is why, as the Constitutional Court notes, the amount of compensation may exceed the amount of losses incurred by the right holder, and this corresponds to the objectives of protection of the provisions established by p.1 of Art.44 of the Constitution.

The practice of application of Resolution No. 28-P is only in formation process, but to date, it can be concluded that the Intellectual Property Court recognizes the applicability of the position expressed by the Constitutional Court on the possibility of reduction of the amount of compensation below the minimum limit only in cases where the circumstances of a particular case completely comply with the criteria set out in Resolution No. 28-P, in particular:

–the offense was committed by an individual entrepreneur;

–the offense was committed for the first time;

–the offense was not gross;

–use of intellectual property is not an essential part of its business activities;

– the amount of compensation exceeds the amount of losses caused to the right holder in many times.

This interpretation of the legal nature of compensation allows to consider that the Resolution of the Constitutional Court, contrary to the fears prevailing today, will not only avoid leading to a more frequent reduction in compensation by the court, but, to the contrary, will allow to reduce the number of such cases if violation of exclusive rights was committed by legal entities or it bears gross nature.

What shall right holders do in terms of uncertainty?

Broad discretionary powers of the court sometimes lead to paradoxical situations. It is common for a court to recognize a fact of violation of the exclusive rights of the plaintiff, reduce the amount of compensation to the minimum limit established by law, and charge legal costs from the plaintiff in proportion to the amount of the claims satisfied. As a result, the amount of the state fee payable by the plaintiff exceeds the amount of the awarded compensation.

However, right holders may increase their chances of recovering compensation in the amount claimed. To do this, they shall take the most active position in the arbitration or civil process: present any evidence confirming the amount of losses, prove the apparent dishonesty of the defendant’s actions, exhaustion of all methods of pre-trial settlement of the dispute.

Also, it should not be forgotten that the court has no right to reduce the amount of compensation unreasonably, therefore, failure of the defendant to prove the disproportion of the amount of compensation and the consequences or the countercount of compensation to be recovered, as well as other manifestations of procedural inaction, should serve as basis for full satisfaction of the claims claimed by the plaintiff (see p.47 of the Review of judicial practice in cases related to the resolution of disputes on the protection of intellectual property rights”, approved by the Presidium of the Supreme Court of the Russian Federation on 23.09.2015, Decision of the Supreme Court of the Russian Federation No. 5-KG16-241 dated 14.02.2017).