According to Article 128(1) of the Korean Patent Act (“KPA”), a patentee or exclusive licensee (hereinafter “patentee”) may claim compensation for damages suffered due to a willful or negligent infringement of the patent right or exclusive license. The KPA allows the Korean courts to choose and use one of the following three methods, as a basis for determining the amount of damages:

(1) Lost profits due to infringement

(2) Reasonable royalties

(3) Reasonable amount of damages

 ▶Lost Profits due to Infringement

Relevant statutory provision: Article 128(2)(i) of the KPA

Perhaps owing to the inherent difficulty in the task of calculating the patentee’s lost profits, the task necessarily requiring the approximate quantification of the patented product the patentee could have sold but for the infringement, Article 128(2)(i) presupposes the entirety of infringing articles transferred by the infringer, subject to certain exceptions explained below, as the amount the patentee could have sold but for the infringement. Accordingly, 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.

As the exceptions, however, the eventual volume of the infringer’s transferred product, subjected to the damages calculation, may be reduced, if the patentee’s production capability is not large enough to accommodate the infringer’s transferred quantity in full, to the patentee’s production capacity. The volume may be further reduced, upon a showing that the patentee could not sell the relevant product beyond a certain level due to, e.g., limited marketing network, sales force, advertisement budget, etc.

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 Case Nos. 2017Na1315 and 2018Na1275).

Statutory presumption of lost profits: Article 128(4) of the KPA

Alternatively, especially when it is difficult to quantify or prove to what extent the patentee suffered loss of 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.

In applying Article 128(4), the courts have developed various methodologies. 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 calculated by dividing the infringer’s sales revenue with the totality of production cost 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 cost from the infringer’s sales income and then deducting an amount equivalent to 15% of the miscellaneous expenses.

It is important to note, however, that courts have determined Article 128(4) is inapplicable in situations where the patentee lacks the capacity to produce the relevant product (see, e.g., Supreme Court Case Nos. 96Da43119, 2006Da1831, and 2013Da21666).

▶Reasonable Royalties: Article 128(5) of the KPA

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. This provision offers an alternative compensation method, focusing on a hypothetical license fee that the infringer would have paid under a licensing agreement.

Furthermore, the KPA allows for the possibility of combining a claim for reasonable royalties with that for lost profits, under Articles 128(2)(i) and (ii). 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.

(i) the objective technical value of the patented invention;

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

(iii) the royalty rate used in a license agreement with the defendant in the past, if any;

(iv) royalties that may be received for a similar invention in a like technical field;

(v) the remaining term of the patent;

(vi) the type of the patented invention;

(vii) availability of substitute technologies for the patented invention; and

(viii) the magnitude of infringer’s profits gained from the infringement.

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

▶Reasonable Amount of Damages: Article 128(7) of the KPA

In instances where the calculation of monetary damages to compensate lost profits is impractical, and the determination of reasonable royalties is hindered by the absence of sufficient evidence or reference, Korean courts are authorized 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 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 Case Nos. 2018Na2063 and 2018Na2070, which considered evidence related to the profits gained by the infringer; and Patent Court Case No. 2021Na1268, which utilized evidence pertaining to both the profits gained by the infringer and reasonable royalties.

▶Prevalent Approach Taken by Courts

The increasing complexities of technologies and business environment involved in patent infringement litigations 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 the judicial activism to undertake a comprehensive review of various factors in determining a reasonable amount of monetary damages, including patentee's claimed amount of lost profits, prevailing royalty rates in the relevant industry, relationship between the disputing parties, and presence of viable non-infringing alternatives.

Moreover, with legislative amendments to Articles 128(8) and (9) of the KPA, the amount of damages for willful infringements is expected to surge, potentially up to fivefold in forthcoming years, which may, in turn, stimulate a rise in the number of patent-related lawsuits in Korea.