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The latest judgment in the long-running dispute between Merck KGaA ("Merck") and Merck Sharp & Dohme LLC ("MSD") provides useful guidance on notional licence fee damages in trade mark infringement and breach of contract claims.
Background
Merck is the successor to a German family-run business established in the 1600s, E. Merck. In the 1800s, a member of the Merck family set up an economically linked business in the USA. MSD is a successor to this entity.
An agreement entered into between Merck and MSD in 1955 (amended in 1970) set out each party's entitlement to the "Merck" trade mark across the world. MSD had the exclusive right to use "Merck" in the USA and Canada, and it was only permitted to use "Merck & Co" or "Merck Sharp & Dohme" outside of these countries if it was paired with a geographical designation.
In 2013, Merck alleged that MSD had breached the agreement and infringed its trade marks by using "Merck" in the UK including on its websites, email domains, social media and marketing materials. After various judgments, the Court granted Merck injunctive relief to restrain further breaches and infringements and ordered this inquiry to damages.
Issues
The issues for the Court to determine included:
- Whether it is appropriate to award damages based on the notional licence fee;
- If so, whether a comparables approach is a reliable basis for the notional fee, and if so, what adjustments should apply; and
- Whether, as an alternative, Merck is able to rely on the economic benefits approach, and if so, how this should be quantified.
Notional licence free
The Court confirmed that licence fee damages are available for trade mark infringement and breach of contract claims where the right that has been infringed is a valuable commercial asset.
When assessing the notional licence fee, it is irrelevant whether the parties would have actually entered into the licence, only that negotiations could have reasonably taken place. The Court, therefore, dismissed several arguments that Merck would not, or could not, have granted MSD a licence to use "Merck".
For example, MSD argued that by granting such a licence Merck would render its own trade marks liable for revocation under s46(1)(d) Trade Marks Act 1994, as it would have misled the public as to the nature, quality or geographical origin of the goods and services. MSD also relied on Article 21 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which prohibits compulsory licences. The Court noted that these provisions cannot be interpreted to preclude an award of notional licence fee damages.
Comparables approach
A comparables approach relies on royalty rates in similar licences to the hypothetical licence. Merck relied on a 0.33% royalty rate in its intragroup licencing scheme, which was based on an EY study. However, under cross-examination of Merck's expert, it became apparent that the EY study was 'statistically meaningless' due to the small sample size used. The Court held (with Merck's expert ultimately accepting) this was not a reliable basis for the comparables analysis. As there was no reliable evidence to base a comparables analysis on, the Court could not award damages to Merck on the comparables approach.
Economic benefits approach
The Court instead adopted the economic benefits approach, which is based on the incremental economic benefits MSD expected to obtain through its use of the rights granted by the licence, and the costs to Merck as a result of granting the rights. The Court considered the benefits to be:
- Avoided websites costs of £4.33 million by not implementing geo-blocking technology and maintaining mirror websites to MSD-branded sites,
- Avoided social media costs of £781,703 for maintaining MSD-branded social media pages, and
- Avoided marketing costs of £566,000 as by linking its products and services to Merck in the UK, MSD avoided costs it would have otherwise incurred in developing and marketing the MSD brand.
Due to a lack of evidence, the Court rejected claims for avoided costs of email migration from @merck.com, the gain to MSD from web traffic diverted to MSD's website, and avoided costs for staff training to ensure compliance with the 1970 agreement.
The licence period was set as 1 January 2010 – 28 July 2020, with the licence fee being deemed to have been paid in a lump sum at the start of the period. The experts are required to calculate adjustments to the above figures to reflect inflation and discounting, which is to be based on a discount rate of 4% to reflect the UK Treasury's ten-year bond rate as at January 2010.
Key takeaways
The Court in this case made it clear it will award notional licence fee damages for trade mark infringement and breach of contract where the right functions as a commercial asset, and that whether the parties would have actually entered into a licence arrangement is not a bar to the Court granting notional licence fee damages. The judgment also provides useful reminders in relation to evidence in a damages assessment:
- A party relying on the economic benefits approach should ensure it properly identifies and supports each of the incremental benefits and avoided costs it seeks to rely on, and
- If you are relying on benchmarking reports and brand licences for a comparables assessment, your evidence needs to be reliable and statistically robust.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
