Calculation of monetary damages under the Korean patent regime

According to Article 128(1) of the Korean Patent Act (KPA), a patentee or exclusive licensee (a patentee) may claim compensation for damages suffered due to wilful or negligent infringement of a patent right or exclusive licence. In such a case, the KPA allows the Korean courts to choose from one of the following three methods to determine damages:

• Lost profits due to infringement;

• Reasonable royalties; and

• Reasonable amount of damages.

Owing in part to the inherent difficulty in calculating a patentee’s lost profits, which would require an approximate quantification of the patented product the patentee could have sold but for the infringement, Article 128(2)(i) presupposes the entirety of the infringing articles transferred by the infringer as the amount the patentee could have sold but for the infringement. Accordingly, subject to certain exceptions explained below, the lost profits are calculated by way of multiplying the total volume of infringing articles sold or distributed by the patentee's profit per unit.

If the patentee’s production capability is not large enough to accommodate the infringer’s transferred quantity in full, an exception may be made and reduce the eventual volume of the infringer’s transferred product that is subject to the damages calculation down to the patentee’s production capacity. The volume may be further reduced upon showing that the patentee could not sell the relevant product beyond a certain level due to, for example, a limited marketing network, sales force, or advertisement budget.

The number of articles transferred by the infringer includes the number of those transferred free of charge. Furthermore, the courts have interpreted the term “patentee’s profit per unit” as the net or marginal profit; i.e., the sales price per unit of the patentee's product less the production cost and sales expenses allocated thereto (see, e.g., Patent Court cases No. 2017Na1315 and 2018Na1275).

Alternatively, especially when it is difficult to quantify or prove the extent of the patentee’s lost profits due to the infringement, Article 128(4) of the KPA allows the patentee to claim damages based on the amount of profits gained by the infringer by virtue of the infringement, which is presumed to be the patentee’s lost profits.

If the actual damages suffered by the patentee fall short of the estimated amount, according to Article 128(4), the presumption may be overturned in whole or in part. However, the infringer must assert and prove the reasons to overturn the presumption (see, e.g., Supreme Court cases No. 2005Da75002 and 2021Da310873).

Since the application of this provision depends heavily on the evidence obtained from the infringer, the Korean courts have adopted a variety of calculation methods that can accommodate a wide range of cases when applying Article 128(4).

In Patent Court Case No. 2016Na1745 and Supreme Court Case No. 2013Da18806, the courts calculated the infringer's profits by multiplying the infringer's sales volume by the standard income ratio. This ratio may be industry specific and is calculated by dividing the infringer’s sales revenue by the totality of the production costs, inclusive of the expenses for raw materials, rent, personnel salaries, and miscellaneous items.

In Case No. 2006Da1831, the Supreme Court estimated the profits by subtracting the main production costs from the infringer’s sales income and then deducting an amount equivalent to 15% of the miscellaneous expenses.

In Patent Court Case No. 2021Na1787, the court ruled that the amount of profits gained by the infringer from the infringement can be calculated by the contribution margin, which is equal to the total sales revenue of the infringing product minus the additional costs incurred for the production and sale of the infringing product. The contribution margin can also be calculated by multiplying the sales revenue of the infringing product by the contribution margin rate, according to the statistics.

It is important to note, however, that courts have determined Article 128(4) to be inapplicable in situations where the patentee lacks the capacity to produce the relevant product (see, e.g., Supreme Court cases No. 96Da43119, 2006Da1831, and 2013Da21666).

In cases where claiming lost profits is not appropriate or preferred, patentees have the option to seek damages based on reasonable royalties. This approach applies to the entirety of articles disseminated by the infringer, as stipulated in Article 128(5) of the KPA, and offers an alternative compensation method that focuses on a hypothetical licence fee that the infringer would have paid under a licensing agreement.

Furthermore, articles 128(2)(i) and (ii) of the KPA allow for the possibility of combining a claim for reasonable royalties with one for lost profits. This dual approach enables patentees to recover additional damages for the amount of articles that exceed their production capability or for the amount of articles they could not sell due to various barriers to market entry or distribution.

In calculating reasonable royalties, the following elements may be considered:

• The objective technical value of the patented invention;

• The royalty rate used in a licensing agreement(s) with a third party for the patented invention, if any;

• The royalty rate used in a licensing agreement with the defendant in the past, if any;

• Royalties that may be received for a similar invention in a similar technical field;

• The remaining term of the patent;

• The type of the patented invention;

• The availability of substitute technologies for the patented invention; and

• The magnitude of an infringer’s profits gained from the infringement.

(See, e.g., Supreme Court Case No. 2003Da15006, dated April 27 2006.)

The number of articles falling outside any possible licensing agreement (for example, the number of articles produced by a third party for whom an exclusive licence has been granted to produce a limited quantity of certain articles) is deducted from the reasonable royalty calculation.

In instances where the calculation of monetary damages to compensate for lost profits is impractical, and the determination of reasonable royalties is hindered by the absence of sufficient evidence or references, Korean courts are authorised to determine and award a reasonable amount of damages at their discretion, under Article 128(7) of the KPA.

The application of Article 128(7) has been a common practice in numerous patent infringement lawsuits in Korea, where the courts have employed diverse methodologies to ascertain an appropriate level of damages, in light of various factors involved in a given case and the evidence presented.

In determining a reasonable amount of damages, courts tend to consider evidence previously submitted in attempts to claim lost profits or reasonable royalties. Representative cases thereof include Patent Court cases No. 2018Na2063 and 2018Na2070, which considered evidence related to the profits gained by the infringer, and Patent Court Case No. 2021Na1268, which utilised evidence pertaining to the profits gained by the infringer and reasonable royalties.

Until recently, the damages assessable against an infringer were limited to actual damages, even in the case of wilful infringement. The revisions to the KPA that entered into effect on July 9 2019 introduced the concept of punitive damages, allowing for greater compensation in the case of wilful infringement, with a maximum award of three times the actual damages.

The revision established the following factors to consider when determining the amount of punitive damages in an infringement action:

• Whether the infringer holds a dominant market position over the patentee;

• Whether the infringer wilfully or knowingly caused the harm by their act of infringement;

• The extent of damages;

• The infringer’s profits gained as a result of the infringement;

• The duration and frequency of the infringement activities;

• Penalties imposed for the infringement (in the case of, e.g., a parallel criminal prosecution);

• The financial status of the infringer; and

• The infringer’s efforts to mitigate damages.

In this regard, there was criticism that the limitation of punitive damages, capped at three times the actual amount of damages, was insufficient to deter technology misappropriation. Addressing the criticism, additional amendments to the KPA, effective as of August 21 2024, increased the cap on punitive damages from three to five times the actual damages, thereby enhancing the effectiveness of preventive measures and remedies against technology misappropriation.

Busan District Court Case No. 2023GaHap42160 was the first case to apply punitive damages for wilful patent infringement. The court considered several factors:

• The plaintiff filed a mediation request with regard to the defendant’s continued use of the patented invention;

• The defendant had sent a proposal letter to the plaintiff to use the patented invention;

• The plaintiff had sent a notice requesting the defendant to cease the patent infringement;

• The defendant bought back inventory from its distributors; and

• The infringement had occurred over approximately seven years.

Based on these factors, the court recognised a 50% increase in damages.

The increasing complexities of technologies and the business environment involved in patent infringement litigation have led the courts towards the judicial preference of employing a discretionary framework for awarding damages, especially when direct evidence for calculating lost profits or reasonable royalties is insufficient.

The discretionary approach has also prompted judicial activism to undertake a comprehensive review of various factors in determining a reasonable amount of monetary damages, including:

• The patentee's claimed amount of lost profits;

• Prevailing royalty rates in the relevant industry;

• The relationship between the disputing parties; and

• The presence of viable non-infringing alternatives.

Moreover, with the legislative amendments to articles 128(8) and (9) of the KPA, as explained above, allowing damages for wilful infringements to be enhanced up to five times, it is expected that the number of patent-related lawsuits in Korea will increase.