Quantifying the losses following IP infringement
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Our expert: Kevin Haywood Crouch is a BDO Partner who sits in the forensic accounting and valuation services team, based in London. Much of his work relates to quantifying matters in disputes, whether in litigation, arbitration or alternative dispute resolution processes.
IP in tech is a key differentiator, and any infringements of another’s IP are actionable in law. But a decision on infringement going in your favour is by no means the end of the story: next comes the delicate art of calculating and agreeing the compensation due to you for the prejudice suffered. Kevin Haywood Crouch provides an insight into BDO’s work in this area.
In my line of work we often support tech companies, including software or hardware-related companies in the computer services space, in calculating the loss of profit arising from various infringement situations. A typical infringement, particularly in the UK context, might relate to:
- patents – intellectual property relating to inventions
- trademarks – intellectual property related to some symbols and names and images used in commerce
- copyright, which relates to literary and artistic works
- trade secrets – a rarer but potentially very costly area of infringement
Our work here kicks in once a court has established that an infringement of one of these kinds has taken place. Smaller claims tend to be dealt with by the IPEC (Intellectual Property Enterprise Court) but bigger claims, which can run into seven figures or more, typically come under the Patents Court within the Business and Property Courts of the High Court. The judge who presided at the original infringement case will often determine the awarding of compensation and costs also.
Quantification of losses aims to restore the injured party to the position they would have been in had the infringement not take place. An alternative, rarer approach, is to seek an account of profits from the infringing party, which is an award of gain-based damages. Calculation and argument need to rest on factual substantiation, and losses need to be shown on the balance of probabilities. All this work takes place in the context of a particular market, with variables and particularities all of its own, so expert sector knowledge, agreed best practice and market benchmarking may all have a part to play.
A key challenge here is that the losses and costs involved are typically not factual; often, the losses relate to the monies which a company might have generated had the infringement not taken place. Such judgements inevitably have elements of the subjective and the hypothetical, though this does not of course make them impossible to ascertain. We might, for example, calculate the value of the potential infringements of a patent, which should then be paid to the injured party by the offender as compensation. Equally, we might work on assessing the profits that a party found to have infringed a patent has made for themselves both directly and indirectly – a sum which can be awarded equitably in law to the original IP holder.
All of this gets you into quite a complicated area of law, because you are dealing with what are known as counterfactual or but-for scenarios. We have to work out what would have happened in a scenario where one party didn’t act as in reality they did. Sometimes, we may act in a case where a patent has been challenged on its validity and that challenge is upheld; then the task is to see what the nature of the loss might have been for the relevant competitor who was wrongly kept off the market for a given period. That period may also include projections into the future.
"In the case of a trademark, we have to calculate the potential value of that infringement to the trademark holder, and/or what actions the trademark holder can now take."
In the case of a trademark, we have to calculate the potential value of that infringement to the trademark holder, and/or what actions the trademark holder can now take. This is where you get into the valuation of brand and other intangible assets like goodwill, and the effect of infringement on those areas. Within BDO, we have specialist valuers who can support here, and there are of course well understood frameworks and methodologies that can help. With a brand valuation, for example, you could look at it from a relief from royalty or royalty-based methodology for calculating what a brand might be worth, which is where you look at the counterfactual scenario of what someone would pay to use that name or symbol, or to otherwise licence it. Or there is the more traditional approach where you look at what a brand value is worth and the strength of a brand, and you relate that to the financials of a company and, as it may be, to the company’s overall brand equity.
Trade secrets and breach of confidentiality
Trade secrets is a less common area, which can be grouped with breach of confidentiality issues. If you have some proprietary knowledge, and someone takes that knowledge and starts to exploit it for their own commercial ends, then here again we need to look at a counterfactual scenario. What is the valuation of the offending company with that knowledge which it has unfairly gained? And what would its value have been without that knowledge? The difference provides the basis for calculating the appropriate compensation for the injured party. This can be an especially complex area because of the nature of trade secrets, which are often ground-breaking and unique to their inventor, so you won’t necessarily have a fully developed idea initially of a secret’s value without extensive investigation and research to see how other people have potentially used it.
In addition, the secret may have been appropriated before its owner was able to develop or monetise it fully, making its eventual possible worth even harder to quantify. Here is where we get into loss of opportunity cases, which have to be approached in a slightly different way. The basis of calculating loss associated with the loss of opportunity does not arise on the typical balance-of-probabilities basis; instead, you first have to calculate the percentage applicable to the counterfactual loss of opportunity itself, which lost chance of gaining the benefit has to be a real or substantive chance. This may be something less than a 50% chance, after which assuming the defendant’s actions are shown to have caused the party to lose that chance, you can calculate the damages as well. In the first instance, however, you first have to calculate the percentage chance of something actually happening, which can both be a fact determining exercise, but also a technical assessment.
With a trade secret, you need to consider contingencies such as whether it’s a fully developed idea, whether there is a marketplace for it, how long that marketplace will take to develop, what the company might have done with its profits, and what else might happen in the intervening period. Counterfactually, you might also have to consider whether the secret might itself have been disrupted by a subsequent innovation which would limit its commercial success (and therefore the scope of compensation due). You may also have to factor in the originator’s sometimes rosy-tinted vision of the secret’s lost earnings with the need to build a credible case, backed by evidence and expert argument, that a court will have a good chance of accepting.
Your case needs to be strongly substantiated because it may well be robustly defended by a team of advisers and lawyers representing the party that was found to be at fault. Some of the sums involved are very significant – claims and awards relating to patent infringements in some of the big pharma cases, for example, can run into tens of millions of pounds.
The benefits of expert advice
As you can imagine, quantifying losses following an infringement is not an area that a business can undertake without consulting expert advice. Only specialists will have the relevant knowledge and experience to be able to work through the counterfactuals and the potential threats to them, the case-law precedents, and issues such as how far into the future the effects of the claim need to be considered.
When a company comes to us for help in this area, we will work with them to gather evidence and build a defensible case. We need witness statements. We need to understand your financial performance and your future financial performance. And we need to understand the impact in your own words, from the historical effect of the infringing product, as well as the preferred valuation approach to take – such as, in the case of patent infringement, a calculation based on your own loss of profits or (for example, in the case of a patent not yet fully developed) a disgorgement of profits remedy. This is critical because you have to make that decision quite early on in the process, and it’s not usually possible to diverge from it later. In this, however, a party can be assisted by an ‘Island Records’ disclosure application for disclosure of limited information to allow the making of an informed choice. Where we can often most add value is in working out which approach might be of most benefit to you in terms of the recovery of proceeds or damages.
In some cases we may be brought in on an advisory basis, for example to review an argument that’s been prepared by another party or to provide a second opinion on a valuation. We can work in the background to support clients if they're working with another consultant, for example, or another accounting firm that’s doing the main work.
Being able to provide a well-argued, robust and credible calculation case will of course be well received by the court, and will help accelerate and optimise your chances of a satisfactory resolution. Here again, our experience can be useful, and it’s where we’ve had some good results for clients, because we aim to consider what’s most realistic, including what's most realistic for a judge. There’s little point in trying to claim for sales that you might have made 20 or 30 years into the future, for example, when most people’s forecasts, even for their own purposes, will only look at three to five years. So we try and make our best guess of what's most likely to be credible, using our experience as well as a required independence if the matter proceeds to court.
For further information or advice email us at [email protected].