Enforcement directive does not preclude award of damages corresponding to twice the amount of the hypothetical royalty

C-367/15

OTK v SFP

Enforcement: Damages

25 Jan 2017

The matter at hand

Under Polish copyright law, a rightholder whose copyright has been infringed may choose to demand from the person who has infringed that right either compensation for the damage that he has suffered, taking account of all the appropriate aspects of the particular case, or, without him having to prove the actual loss and the causal link between the event giving rise to the infringement and the loss suffered, payment of an amount corresponding to twice the amount of the appropriate fee which would have been due if permission had been given for the work concerned to be used.

The referring Supreme Court, having doubts as to whether this provision is compatible with Article 13 of the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, asked the ECJ, in essence, whether an award of damages corresponding to twice the amount of the appropriate fee is permissible, regard being had to the fact that recital 26 of the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights states that it is not the aim of the directive to introduce punitive damages.

The judgment of the ECJ

With reference to Hansson (C-481/14), the ECJ reiterates that the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights “lays down a minimum standard concerning the enforcement of intellectual property rights and does not prevent the Member States from laying down measures that are more protective” (paragraph 23). The ECJ notes that this also applies under Article 1 of the TRIPS Agreement, Article 19 of the Berne Convention and Article 2 of the Rome Convention, which permit Contracting States to grant the holders of the rights concerned wider protection than that respectively laid down by those instruments (paragraph 24).

“Accordingly, the Directive does not preclude national legislation which provides that the holder of economic rights of copyright that have been infringed may require the person who has infringed those rights to compensate for the loss caused by payment of a sum corresponding to twice the amount of a hypothetical royalty” (paragraph 25).

The ECJ holds that this interpretation cannot be called into question by the fact that compensation calculated on the basis of twice the amount of the hypothetical royalty is not precisely proportional to the loss actually suffered by the injured party, because that characteristic is inherent in any lump-sum compensation, like that expressly provided for in Article 13(1)(b) of the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights (paragraph 26).

The fact that the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, as is apparent from recital 26 thereof, does not have the aim of introducing an obligation to provide for punitive damages does not lead to a different interpretation either. “The fact that the Directive does not entail an obligation to provide for ‘punitive’ damages cannot be interpreted as a prohibition on introducing such a measure” (paragraph 28).

That being said, the ECJ holds that there is no need to rule on whether or not the introduction of punitive damages would be contrary to Article 13 of the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, because “it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages” (paragraph 29). In this regard, the ECJ notes, recalling Liffers (C-99/15), that “mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs (…) that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice (…) or payment of interest on the sums due” (paragraph 30).

The ECJ holds that a provision allowing damages to be calculated on the basis of twice the amount of the hypothetical royalty does not conflict with the concept of causality, considering that this only requires the holder of the infringed right to prove a causal link between the event giving rise to the copyright infringement and the loss suffered, but not between that event and the precise amount of the loss suffered. According to the ECJ, requiring the latter would be “irreconcilable with the very idea of setting damages as a lump sum and, therefore, with Article 13(1)(b) (…), which permits that type of compensation” (paragraph 32).

In the light of the foregoing, the ECJ concludes that Article 13 of the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights “must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, under which the holder of an intellectual property right that has been infringed may demand from the person who has infringed that right either compensation for the damage that he has suffered, taking account of all the appropriate aspects of the particular case, or, without him having to prove the actual loss, payment of a sum corresponding to twice the appropriate fee which would have been due if permission had been given for the work concerned to be used.”

The ECJ does note, however, that it is possible that “in exceptional cases, payment for a loss calculated on the basis of twice the amount of the hypothetical royalty will exceed the loss actually suffered so clearly and substantially that a claim to that effect could constitute an abuse of rights, prohibited by Article 3(2) of the Directive” (paragraph 31).

Commentary

Although it may at first glance seem that the ECJ gives its blessing to national legislation allowing for punitive damages, a more careful read of the judgment learns that the ECJ refrains from ruling on that issue. After all, the ECJ holds that “without there being any need to rule on whether or not the introduction of punitive damages would be contrary to Article 13”, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages. In this regard, the ECJ considers that an amount of twice the hypothetical royalty fee is not excessive in light of the fact that apart from missed royalties, the damages suffered also consist of, for example, research costs and moral prejudice (see paragraphs 29 and 30). For this reason, the ECJ finds that a compensation calculated on the basis of twice the amount of the hypothetical royalty is permissible. The ECJ, however, leaves room for the argument that such compensation may, in exceptional cases, exceed the loss actually suffered “so clearly and substantially that a claim to that effect could constitute an abuse of rights (paragraph 31). With this, the ECJ seems to reject the concept of punitive damages after all, or at least leaves room for the position that a claim evidently encompassing more than the loss actually suffered conflicts with the Enforcement DirectiveDirective 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights.