Intellectual property disputes in Australia
1.???Introduction
Intellectual property (IP) is a term that most people have heard but cannot actually define precisely. An acceptable general definition coined by Stewart et al. (2017) is the sets of lawful rights which protect the economic investment in creative effort. Creative effort mainly encompasses patents, trade marks, copyrights and trade secrets. Nowadays, intellectual property and other intangible assets often represent a large portion of the purchase price of a company. It has actually been estimated that more than 80% of the corporate value in the United States derive from this class of assets. This trend will only be amplified in the coming years as an increasing number of patents and trademarks are registered every year. Indeed, it is an effective strategy for companies to generate revenue through commercialisation or licensing of their innovations (RSM, 2018).
Some people claim that ideas, and by extension innovations, due to their unconfined and incorporeal nature, should be allowed to flow freely around the world and not be the subject of property, especially when the moral and mutual instruction of man is considered. On the contrary, many economists argue that intellectual works must be made exclusive to reward their author, hence the need for intellectual property. If such protection did not exist, innovators would not bother engaging in creative activities because non-innovators would benefit from their creations by poaching them. Ultimately, this would seriously hinder scientific and technical progress (D’Rosario, 2017). Intellectual property disputes arise when a plaintiff accuses a defendant to have infringed their IP rights, e.g. unauthorised copying or unlicensed selling, and seeks compensation from the defendant in the form of damages, injunctions or other means in order to make them whole again.
In Australia, as a former colony of the United Kingdom, the laws protecting intellectual property logically derive from the imperial legislation which were tailored to local statutes. Over the past two decades, they have increasingly diverged due to the influence of the European Union on the UK’s legislation as well as the Commonwealth making major amendments to the copyright and patent laws (Stewart et al., 2017). Since Australia is organised as a federation, it has a two-tier court system: the Federal Court of Australia and the State/Territory Courts. Although there are IP registries in each capital city of the States and Territories, most litigation is handled by the Federal Court of Australia. This particular type of litigation and associated awards of damages are often complex for two main reasons. The first one is the difficulty in valuing intellectual works, and damages as a consequence, due to their incorporeal nature. Physical properties can easily be appraised by adding up the often well-known value of each of their components; it is not as straightforward for IP. The second reason is the complexity in defining precisely the rights to use an IP. Again, the definition and enforcement of the right to use a physical good (e.g. rental car) is much simpler than for an intangible one (e.g. song in digital format) (D’Rosario, 2017).
The present paper will first focus on the types of intellectual property and legal frameworks surrounding them. It will then provide an overview of the litigation process in Australia. Finally, the main approaches to damages calculation, and more particularly, reasonable royalty damages will be explained with concrete examples.
2.???Intellectual property and the law
A.????Different types of intellectual property
According to the Article 2 of the 1967 Convention establishing the World Intellectual Property Organization (WIPO), intellectual property refers to the rights relating to:
“(1) literary, artistic and scientific works;
(2) performances of performing artists, phonograms and broadcasts;
(3) inventions in all fields of human endeavour;
(4) scientific discoveries;
(5) industrial designs;
(6) trade marks, service marks, and commercial names and designations;
(7) protection against unfair competition;
and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.”
The WTO Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement (1994), which is the most used document globally to standardise IP laws, also refers to these 7 categories. In Australia, they fall under statutory regimes, the mains ones being (Stewart et al., 2017):?
B.?????Legal frameworks, law makers and enforcers
In Australia, intellectual property is mainly protected by statutory regimes designed by the Commonwealth Parliament such as the Copyright Act 1968 (Cth), the Patents Act 1990 (Cth) or the Trade Mark Act 1995 (Cth). The government recognised the need to create statutory provisions in order to balance the questions of public access with fairness to the rights-owner. Although very different, these regimes show similarities in the way they confer precise rights to the IP-owner, which are essentially negative, as their aim is to prevent others from using IP without authorisation from the owner.
Common law also plays a significant role in the protection of IP. Firstly, most of the statutory regimes mentioned earlier derive from it. Secondly, the Acts leave some degree of uncertainty and interpretation which is handled by the courts. The decisions they render are an important source of IP rights: law of contract, ownership by an employer of an employee’s creative work, or tort of passing off are good examples of the impact of common law on the protection of IP.
The Australian Competition and Consumer Commission (ACCC) is also involved in the law making process through the Competition and Consumer Act 2010 (Cth), which deals with restrictive practices and prohibits anti-competitive conduct. More specifically, the Australian Consumer Law enclosed in the Act is often used to fight misleading or deceptive conduct in the course of trade and commerce which is relevant to trade mark infringement or the tort of passing off (Stewart et al., 2017).
The responsibility for enforcing intellectual property laws is split between several federal actors. Administration of copyright protection is ensured by the Office for the Arts at the Department of Infrastructure, Transport, Regional Development and Communications while patents, designs, trade marks and plant breeder’s rights are the responsibility of the Department of Industry, Science, Energy and Resources. Within this Department, IP Australia is the agency which administers the registration systems for these 4 regimes (IP Australia, 2021).
3.???Intellectual property litigation
A.?????Causes of action
When it comes to patent infringement, the claim can be brought by the patentee or an exclusive licensee. In the latter case, the patentee must join the licensee as a respondent or decide to become a co-applicant. The onus of proof is on the plaintiff who must demonstrate that the infringer has been using the invention without the patentee’s authorisation and his/her rights in regards to the patent is still in force (IPA Australia, 2018). The opposite action is the revoking of a patent where a person can apply for an order to cancel a patent, usually for the following reasons: the patentee is not entitled to the patent, the invention is not patentable because it is obvious or not novel, the patent is not valid, e.g. vague/wrong description (Thomson Geer Lawyers, 2013).
Similarly, direct infringement of copyrighted IP occurs when an infringer reproduces, disseminates, sells, imports the work in a material form without the owner’s permission (Stewart et al., 2017). Evidence of the objective similarity between the two works and of the reproduction of a substantial part of the work must be provided by the plaintiff. Common lines of defence for defendants are the originality, ownership, and human origin of the work.
Regarding trade marks and branding, even if a mark is not registered, proceedings can be engaged under statutory consumer protection legislation invoking misleading or deceptive conduct, or passing off which occurs when a business presents their products like the products of another business (packaging, distribution channels, etc…). It is important to underline the fact that if a mark has not been used for a specified time or the name has become generic, then it is no longer protected (Thomson Geer Lawyers, 2013).
B.?????Trial process
As mentioned previously, the Federal Court mainly deals with IP infringement cases. Before any proceedings are to be commenced, the applicant must have made all possible attempts at settling the disputes by himself. Failure to do so may result in financial penalties in the judgement. The different steps of the trial process are as follows (Thomson Geer Lawyers, 2013):
1)?????Submission by a plaintiff to the court of an originating application and statement of claim which also have to be served to the defendant within 5 weeks.
2)?????Filing of a defence by the defendant to the statement of claim. The plaintiff may reply to that defence. These are called the pleadings in which the disputed issues and the material facts are set. The plaintiff must state the occurrences of IP infringement, the defendant must explain the invalidity of the IP right he may seek.
3)?????The Judge manages the litigation through directions hearings during which programming orders are issued, e.g. discovery of documents and delivery of evidence, to prepare the matter for trial.
4)?????A party may apply for discovery if it is established that will speed up the resolution of the dispute. The parties must first discuss the nature of the documents sought which have to be related to matters raised in the pleadings. The court can make orders limiting access to confidential documents in litigation involving competitors. In any case, no document can be used outside of the proceedings.
5)?????Evidence-in-chief is then submitted to the court by the plaintiff followed by the defendant in the form of affidavits. Further evidence can be provided in answer and reply. Due to the complexity and technicality of IP proceedings, expert evidence is often used, e.g. mechanical engineer in patent infringement, IT programmer in software copyright dispute. Subpoenas may be issued to obtain further evidence from the opposing party.
6)?????The trial starts with the plaintiff laying his/her evidence and calling his/her witnesses who can be cross-examined by the defendant. It is then the turn of the defendant to follow suit if he/she wishes to. The trial ends with both parties handing final written submissions to the court which are supplemented orally.
7)?????Depending on the complexity of the dispute and the Judge’s case-load, judgment is generally rendered 3 to 12 months after the trial which is usually appealed by the losing party in IP litigation. Appeals are handled by the Full Federal Court (3 Judges) and ultimately by the High Court of Australia (in rare instances).
During the steps that lead to the trial, it is possible for an IP owner to request an interlocutory injunction which prohibits the alleged infringer from making use of the IP until the matter is settled at trial. However, compelling evidence or a serious degree of harm must be proven to be granted such decision (Clarke, 2011).
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It is also important to note that in IP matters, the court usually splits the litigation in two trials: the first one to determine liability, the second one to deliver a judgement on quantum of damages. If infringement is proven following the first trial, a permanent injunction will be effected to formally forbid the infringer from using the IP again, unless a licence is granted by the IP owner (IPA Australia, 2016). The second trial involves discovery and evidence too, except that documents and evidence filed this time mainly serve the purpose of calculating damages or an account of profits. In reality, very few IP cases in the Federal Court, in which a claim for damages is sought, run to an end. This is mainly due to the fact that substantiating a claim for damages is a complex, costly and risky process and often not worth it. IP owners tend to rely more on the user principle where infringers are to pay them a reasonable amount for the simple reason they wrongfully used the IP, even if no loss has been caused to the owner and the infringer has not made any benefit. This amount can be called reasonable rent, hiring fee, licence fee or notional royalty (Justice Yates, 2016).
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4.???Damages calculation
A.?????Calculation approaches
When calculating damages in an IP infringement case, several approaches can be considered according to the specific circumstances such as the nature of the IP, information available, and the plaintiff’s objective. The most common ones are as follows (RSM, 2018):
B.?????Compensation or restitution
These approaches aforementioned serve as a basis for the calculation of loss of profit and reasonable royalty damages (Clarke, 2011):
The natures of damages is compensatory in the way they seek to put the plaintiff in the position he/she would have been should the infringement had not occurred, which implies a loss or damage. However, when an infringement has occurred which has not caused such loss or damage to the owner, damages will not be awarded. Other financial penalties may be considered in the form of (D’Rosario, 2017) :
Although yielding different results, the court cannot order the payment of damages and an account of profits as they would overlap. It is interesting to note that in copyright infringement cases, damages are not available if the infringer was not aware he/she was acting wrongfully. The court can only order an account of profits and delivery up where the infringing goods are transferred to the copyright owner instead of being destroyed (IPA Australia, 2016).
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C.?????Reasonable royalty damages
The present paper will now focus on reasonable royalty calculations since these types of damages are specific to IP litigation, especially when it comes to patent infringement. As mentioned previously, this kind of remedy is indicated when the IP owner already has licenses in effect for the infringed IP asset and in situations where he/she has not benefited economically from his/her innovation yet or lacks evidence to obtain a loss of profits (Clarke, 2011).
The 25% rule of thumb used to be applied for several decades although it has been now abandoned. Under this rule, an IP owner would be entitled to 25% of the expected profits made by the infringer (Guralnick, 2020):
Where RR is the royalty rate, PP the projected profits and PNS the projected net sales. If an infringer’s projected profits were $200?000 out of projected net sales of $800?000, then the royalty rate to be applied to his/her net sales would be:
This method is no longer used for obvious reasons like its over-simplicity and lack of empirical evidence. However, it can be a good starting point for negotiation and rough determination of a royalty rate (Heberden, 2011).
More sophisticated approaches are used nowadays such as:
Where RRD are the reasonable royalty damages, AT the annual turnover, RR the royalty rate, and AR the advertising rate. The annual turnover of $920?000 is the average annual turnover reported by pizza restaurants in Australia in 2016 (Bowling, 2016). Considering the infringer would also have benefited from the corporate advertising, it is fair to include the corresponding rate in the calculations.
Extract from CSL annual report 2019/2020 (CSL, 2020)
If an infringer was to use one of CSL patents without CSL’s authorisation, one way to determine a reasonable royalty rate is to calculate the proportion of revenue derived from patents in relation to overall revenue. For each financial year, that would give:
Therefore, a reasonable royalty rate around 2% applied to the sales related to the infringed patent could be considered, although it is a bit low in this example compared to industry norms.
2. Transactional approach: it sets royalty rates according to comparable IP assets in comparable markets and circumstances. Industry norms can also be considered when no comparable IP assets exist. Many factors must be taken into account before determining the royalty rate: similarities and differences between subject IP and benchmark IP, comparable license terms and conditions as well as coverage of the market, comparability of the markets. The graph below shows the median royalty rate by industry. While it is around 5% for most of them, caution must be taken as it can vary greatly within an industry, e.g. software, internet, entertainment (Heberden, 2011).
Median royalty rate by industry (Silva, 2016)
3. Analytical approach?(Guralnick, 2020): the royalty rate is determined simply by subtracting the profit margin of an infringing product by the profit margin of a comparable non-infringing product. This method shows limitations when the differential is reduced by fixed costs, market trends or more favourable licensing options to the IP owner.
Obviously, the methods described above have been simplified for understanding purposes; many factors must be considered in their selection and implementation (e.g. applicable damages period, pre-judgement interest). Other more complex approaches to calculate reasonable royalty exist such as the Weighted Average Cost of Capital (WACC) where any additional revenue above what is needed for an infringing company to service its capital could be the subject of reasonable royalty (Guralnick, 2020).
5.???Conclusion
The aim of this paper was to provide a broad overview of intellectual property disputes in Australia from legal, procedural and technical points of view.
The importance of intellectual property cannot be denied as it can be the only source of revenue for some industries (e.g. publishers) and represent a massive amount of investment for others (e.g. pharmaceutical). Over the past century, this importance has been amplified by the progress made in technology. The internet has facilitated reputation building through online advertising; digital storage and copiers of all sorts have made unauthorised access and copying very easy. Therefore, there is a need for laws to evolve simultaneously while preserving free competition in the interests of the customers (Stewart et al., 2017).
When calculating damages, there are no defined rules that the courts must follow. They should adapt to the specific circumstances of each case: the IP holder’s loss of profits, the license fee that could have been obtained from the infringing sales, the prejudice caused to the IP holder’s interests (e.g. harm to reputation, price erosion). This is one of the reasons why few IP owners pursue litigation processes until the award of damages and primarily seek a permanent injunction (Clarke, 2011), together with the complexity of proving the extent of the damage. Cases involving networked patents (new patents relying on prior patents) or the valuation of the contribution of a trade mark are good examples of the sheer degree of complexity in some IP disputes.